Annual Report 2010 Report Annual

www.daiwa-grp.jp Annual Report 2010 Report Annual

Annual Report 2010 Year ended March 31, 2010

Printed in Japan Daiwa Securities Group Inc. Corporate Data

Head Office Independent Public Accountant GranTokyo North Tower KPMG AZSA & Co. 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-6751, Japan Tel: (81) 3-5555-1111 Stock Exchange Listings What Characterizes “Originality” Tokyo, Osaka, Nagoya Website http://www.daiwa-grp.jp/ir/english/ Transfer Agent and Registrar of the Daiwa Securities Group ? The Sumitomo Trust and Banking Company, Limited Commencement of Operations Stock Transfer Agency Department May 1, 1902 3-1, Yaesu 2-chome, Chuo-ku, Tokyo 104-8476, Japan Date of Founding December 27, 1943

Common Stock Issued and Outstanding 1,749,358 thousand shares (as of March 31, 2010)

Number of Shareholders 131,083 (as of March 31, 2010)

For further information, please contact: Daiwa Securities Group Inc. Investor Relations Tel: (81) 3-5555-1300 Fax: (81) 3-5555-0661 Email: [email protected] URL: http://www.daiwa-grp.jp/ir/english/ Contents

p1 What Characterizes “Originality” p27 Review of Operations of the Daiwa Securities Group ? p28 At a Glance Core Business Segments of p8 Summary of the Daiwa Securities Group the Daiwa Securities Group p10 Financial Highlights p30 In the Industry Market Shares of Core p12 To Our Shareholders and Investors Business Segments p20 Message from the CFO p32 Retail Daiwa Securities p22 Special Feature: p36 Wholesale Daiwa Securities Capital Markets “Racing to Make Asia Our Home Market” p40 Investment Daiwa PI Partners The Daiwa Securities Group aims to strengthen its p41 Daiwa Corporate Investment operating base in Asia on a larger scale and with greater p42 Asset Management Daiwa Asset Management speed than ever before, to become one of Asia’s leading p44 Daiwa SB Investments comprehensive financial services companies. p46 Systems and Research Daiwa Institute of Research Holdings

daiwa securities group annual report 2010 daiwa securities group annual report 2010 131 To a corporation, “Originality” is the wellspring of competitiveness. From products and services to a company’s unique culture, creating value that competitors cannot imitate is what enables a corporation to sustain its growth. “Originality” of the Daiwa Securities Group is alive and well in its corporate culture and philosophy. It is by rediscovering this “Originality” that the Group will achieve lasting growth.

The following is a reader-friendly overview of the original features of the Group’s operations.

p47 Management Systems and CSR Activities p69 The Daiwa Securities Group in Figures

p77 Financial Section Forward-Looking Statements

p121 Other Information This annual report contains forward-looking statements about the Daiwa Securities Group. You can identify these statements by the fact that they do not relate strictly to historic or current facts. These statements discuss p131 Corporate Data future expectations, identify strategies, contain projections of results of operations or of financial condition, or state other “forward-looking” information. These statements are based on currently available information and represent the beliefs of the management of the Daiwa Securities Group. These statements are subject to numerous risks and uncertainties that could cause the Daiwa Securities Group’s actual results, performance, achievements or financial condition to differ materially from those described or implied in the forward-looking statements. TheD aiwa Securities Group undertakes no obligation to publicly update any forward-looking statements after the date of issuance of this annual report. These potential risks and uncertainties include, but are not limited to: competition within the financial services industries in Japan and overseas, our ability to adjust our business focus and to maintain profitable strategic alliances, volatile and sudden movements in the international securities markets, foreign exchange and global economic situations affecting theD aiwa Securi- ties Group. “FY2009” refers to the fiscal year ended March 13 , 2010, and other fiscal years are referred to in a corresponding manner.

daiwa securities group annual report 2010 What Characterizes “Originality” of the Daiwa Securities Group ?

I. Pursuing Sustainability by Winning Trust

Earning the Trust of Customers and Society: The Best Way to Sustainable Growth

During the global financial crisis that erupted in the second half of FY2008, financial institutions that had taken on excessive risk suffered huge losses when business conditions deteriorated. These losses triggered bankruptcies and government rescue packages, exposing the damage caused by attempts to maximize short- term profits. Rather than pursuing short-term profits, the Daiwa Securities Group endeavors to expand its operating base by winning the confidence of customers and society.W e believe that earning the trust of all our stakeholders to become one of “Japan’s excellent companies” is the best way to achieve lasting growth.

daiwa securities group annual report 2010 I. An Expanding Base of Operations

Retail Wholesale Daiwa Securities Cash Management Number of Companies with Daiwa Securities Service (CMS) accounts Capital Markets as lead manager (Thousand accounts) (Number of companies) 3,500 1,000

3,000

800

2,500

600 2,000

1,500 400

1,000

200

500

0 0 01 02 03 04 05 06 07 08 09 (Fiscal year) 99 00 01 02 03 04 05 06 07 08 09 (Fiscal year)

daiwa securities group annual report 2010 What Characterizes “Originality” of the Daiwa Securities Group ?

II. Motivation, Social Mission, and Our Pride as Professionals

The Drivers of Growth

There are limits to how far monetary compensation alone can boost employee motivation. Similarly, mergers and acquisitions that merely aim to increase the size of a company cannot be expected to unify people and organizations to full advantage right away. The Daiwa Securities Group strives to create a highly motivated organization by providing a working environment in which all employees can excel. Moreover, we recognize that each employee’s contributions to the overall development of society through the financial and capital markets, which represent our social mission and our pride as professionals, are the drivers of the Group’s growth.

daiwa securities group annual report 2010 II. Growth Fueled through a Dynamic Organization and Fulfillment of Our Social Mission

Popularity Ranking of Companies Where Market Share of University Students Would Like to Work Impact Investment Bonds

(Overall rank)

40 % 71% 40

60 71%

80 Daiwa Securities 80 DaiwaOther SecuritiesSecurities Companies Other Securities Companies

Daiwa Securities 100 100 Source: OtherDaiwa Securities Securities Companies *Source: Bonds Daiwa sold for Securities retail investors * (asBonds of June sold 30,for retail2010) investors Source: (as Daiwa of June Securities 30, 2010) * Bonds sold for retail investors 120120 999900000101 02 03 0204 03 0504 06 05 07 0608 09 07(Fiscal 08 year) 09 (Fiscal year) (as of June 30, 2010) Source: Nikkei Nikkei Inc. Inc.

daiwa securities group annual report 2010 What Characterizes “Originality” of the Daiwa Securities Group ?

III. Highly Flexible and Innovative Initiatives

Staying Ahead of the Times as a Leading Company

TheD aiwa Securities Group targets medium- to long-term growth underpinned by a consistent philosophy. At the same time, we have flexibly responded to the changing business environment. For example, we became the first publicly listed company to transition to a holding company structure, and we launched Japan’s first online trading service, among other innovative products and services. The Group strives to be a leader that is ever at the forefront of the industry and a step ahead of the times.

daiwa securities group annual report 2010 III. History of Daiwa’s Innovative Initiatives

1971 Lead-managed the world’s first Asian dollar bond (DBS bond) issue

1978 Lead-managed the world’s first euro-yen bond issued by ADB in Asia

1986 Launched Japan’s first “home-trading service”

Became Japan’s first listed company to “conduct share buy-back” after 1995 amendment to the Commercial Law

1996 Lead-managed the first-ever listing by an Asian company on the TSE

1999 Became Japan’s first listed company to move to a “holding company structure”

Became the first securities company in Japan to establish a joint venture in China, 2002 commencing operations at “Daiwa SMBC-SSC Securities Co., Ltd.,”* in 2004

2004 Transit to a “Committee System” of corporate governance

2007 Lead-managed the first-ever listing by a Chinese company on the 1st section of the TSE

Became Japan’s first company to develop and market “Vaccine Bonds” for 2008 individual investors

Began domestic equities CFD (offering approx. 100 stocks) in “Daiwa CFD,” 2010 an over-the-counter CFD trading service

* Currently Daiwa SSC Securities Co., Ltd.

daiwa securities group annual report 2010 Summary of the Daiwa Securities Group

Organizational Chart

Holding Company Daiwa Securities Group Inc.

Wholesale Systems and Research Retail Daiwa Securities Daiwa Institute of Research Daiwa Securities Co. Ltd. Capital Markets Co. Ltd.*1 Holdings Ltd.

Four Core Group Operations Group Support Operations

Daiwa Securities Business Center Asset Management Investment Co. Ltd. Daiwa Asset Management Co. Ltd. Daiwa Corporate Investment Co., Ltd.*2 Daiwa Property Co., Ltd. Daiwa SB Investments Ltd. Daiwa PI Partners Co. Ltd.*3 Other Companies

*1 Daiwa Securities SMBC changed company name to Daiwa Securities Capital Markets on January 1, 2010. *2 Daiwa SMBC Capital changed company name to Daiwa Corporate Investment on July 1, 2010. *3 Daiwa Securities SMBC Principal Investments Co. Ltd. was separated into two companies: Daiwa PI Partners Co. Ltd., which became the new investment company, and Daiwa Securities SMBC Principal Investments Co. Ltd., which took over existing investment operations on February 1, 2010.

Structure of Major Companies in the Daiwa Securities Group (as of July 1, 2010)

Daiwa Securities Group Inc.

Retail Wholesale Investment Asset Management Systems and Research

Daiwa Institute of Daiwa Securities Co. Daiwa Securities Daiwa Corporate Daiwa Asset Research Holdings Investment Co., Ltd. Management Co. Ltd. Ltd. Capital Markets Co. Ltd. Ltd.

Daiwa Capital Daiwa Securities Daiwa Institute of Markets Europe Daiwa SB SMBC Principal Research Ltd. Limited Investments Ltd. Investments Co. Ltd Daiwa Capital Daiwa Institute of Markets Hong Daiwa Real Estate Research Business Daiwa PI Partners Co. Kong Limited Asset Management Innovation Ltd. Ltd. Co. Ltd. Daiwa Capital Markets America Inc.

daiwa securities group annual report 2010

Earnings Structure

Breakdown and composition of net operating revenues for FY2009

Net financial income Net gain / loss on private equity and 1.6% ¥7.0 billion other securities and others ¥87.2 billion Net gain on trading 19.0% ¥110.9 billion 24.2% Net operating revenues Commissions ¥458.1 billion ¥252.8 billion Others ¥16.8 billion Equity ¥56.3 billion 55.2% 6.7% 22.3%

0.3% 27.9% Commissions Fixed income ¥0.6 billion ¥252.8 billion

Investment banking ¥70.6 billion 42.8% Asset management ¥108.2 billion

The Daiwa Securities Group’s medium-term management plan, “Passion for the Best” 2011* Management Targets

Consolidated ordinary income: ¥200 billion or higher Management Targets Consolidated ROE: 10% or higher Market capitalization: In the top 40 listed Japanese companies

Retail Wholesale & Investment Asset Management

Ordinary income: ¥120 billion Ordinary income: ¥60 billion Ordinary income: ¥20 billion

Indicators of customer satisfaction [ Daiwa Asset Management ] Market share of assets under management in publicly offered Net inflow of retail assets Broker rankings equity investment trusts

[ Daiwa SB Investments ] League tables Ranking in the survey of pension customers’ evaluations

* From April 1, 2009 through March 31, 2012

daiwa securities group annual report 2010 Financial Highlights Daiwa Securities Group Inc. (Consolidated) * Please refer to pages 70–73 for the “Five-Year Financial Summary,” “Breakdown by Business and Geographical Region,” and “Twelve-Quarter Financial Summary.”

Millions of yen (Except as otherwise specified) FY2006 FY2007 FY2008 FY2009 Yoy L Operating Performance Operating revenues 917,308 825,422 413,936 537,914 30.0% Commissions 306,736 294,425 208,881 252,863 21.1% Equity 98,987 84,593 56,402 56,388 –0.0% Fixed income 2,667 2,133 991 698 –29.6% Asset management 106,906 136,377 97,001 108,266 11.6% Investment banking 74,986 47,551 34,915 70,648 102.3% Others 23,190 23,771 19,572 16,863 –13.8% Net gain on trading 157,333 103,361 40,921 110,955 171.1% Net gain on private equity and other investments 32,818 19,160 –79,478 75,584 – Interest and dividend income 373,453 358,423 192,664 54,729 –71.6% Service fees and other revenues 46,968 50,053 50,948 43,783 –14.1% Interest expenses 354,245 339,784 176,034 47,659 –72.9% Cost of service fees and other revenues 36,299 38,147 38,358 32,150 –16.2% Net operating revenues 526,764 447,491 199,544 458,105 129.6% Selling, general and administrative expenses 340,373 363,859 343,270 362,844 5.7% Operating income 186,391 83,632 –143,726 95,261 – Ordinary income 195,415 90,143 –141,150 102,917 – Net income 92,725 46,411 –85,039 43,429 –

L Financial Conditions (Fiscal year-end) Total assets 14,411,265 17,307,120 14,182,579 17,155,345 21.0% Trading assets 5,082,219 7,857,122 6,203,742 7,654,334 23.4% Private equity and other investments 440,178 471,732 515,770 218,841 –50.5% Investment securities 234,103 215,611 167,884 191,905 14.3% Net assets 1,223,226 1,082,924 952,329 1,017,529 6.8%

L Per Share Data (Yen) Net income 67.90 33.69 –63.16 26.41 Net assets 665.98 607.64 534.99 530.27 Cash dividends applicable to the year 28.00 22.00 8.00 13.00

L Financial Ratios (%) Return on equity (ROE) 10.8% 5.3% – 5.3% Equity ratio 6.5% 4.7% 5.1% 5.4%

Note: Net income per share is calculated on the basis of the average number of shares outstanding during the fiscal year.

Item of account Comment

This covers equity brokerage commissions from securities trading activities, asset management fees from the sale and management of Commissions investment trusts, and investment banking commissions from stock and bond underwriting and M&A advisory activities.

Net gain on trading Gains (losses) on negotiable securities and derivatives held for trading operations including mark-to-market valuation gains or losses.

Net gain on private equity and other investments Gains (losses) associated with investment business conducted by the Daiwa Securities Group.

Trading assets Assets related to the trading of stocks, bonds, derivatives, and other financial products held for trading operations.

Private equity and other Investment in securities, monetary claims and real estate-related assets by the Daiwa Securities Group, and capital extended investments under limited partnership agreements.

10 daiwa securities group annual report 2010 Net Operating Revenues Net Operating Revenues Ordinary Income (quarterly data)

(¥ billion) (¥ billion) (¥ billion)

600 200 300

500 150 200

400

100 100

300

50 0

200

0 -100 100

0 -50 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q -200 05 06 07 08 09 (Fiscal year) 05 06 07 08 09 (Fiscal year) FY2008 FY2009

Net Income Shareholders’ Equity Annual Dividend Paid

(¥ billion) (¥ billion) (¥)

200 1,000 40

800 30

100

600

400

10 200

-100 0 0 05 06 07 08 09 (Fiscal year) 05 06 07 08 09 (Fiscal year-end) 05 06 07 08 09 (Fiscal year) Note: Shareholders’ Equity = owners’ equity + valuation and translation adjustments

daiwa securities group annual report 2010 11 To Our Shareholders and Investors

“The Daiwa Securities Group has made a new start with strong solidarity and passion.”

Shigeharu Suzuki, President and CEO Daiwa Securities Group Inc.

12 daiwa securities group annual report 2010 [ Performance Review for FY2009 ]

Q1. Can you give an overview of FY2009 ? A1. Our performance recovered, and I feel that efforts to strengthen our operating base have had solid results.

Business Environment Corporate performance improved in FY2009, buoyed by large-scale government spending in major countries as well as favorable economic conditions in China and other emerging markets. There were also signs that the downtrend in private capital investment bottomed out in the latter half of the fiscal year.A mid such operating conditions, the equity financing market in Japan grew substantially as many corporations rushed to solidify their financial bases for the next stage of growth. Meanwhile, in the stock market, the average daily trading value on the Tokyo Stock Exchange contracted some 20% compared with the preceding fiscal year, despite upswings in the first half and at the start of the new calendar year.

Return to Profitability, ROE to 5.3% Under such business conditions, the operating revenues of the Daiwa Securities Group (hereafter, the “Group”) surged 30% year on year, and ordinary income turned positive to the tune of ¥102.9 billion, recovering to an even higher level than in FY2007. Furthermore, ROE reached 5.3%. In the retail business, share subscription and sales of investment trusts increased. In addition, the strong performance of underwriting in the wholesale business, combined with gains on sale of shares held in the investment business, contributed to improved results.

Steadily Expanding the Operating Base Despite the rebound in performance, with ordinary income still at around 40% of the FY2005 level, I remain far from content. However, I think we have seen solid results in expanding our operating base. For instance, we have expanded the balance of the Group’s assets under custody, mainly in the retail business; served as lead manager for a number of large-scale deals in the wholesale business; and steadily increased the balance of our investment fund assets under management.

Examples of Daiwa’s Expanding Operating Base

March 31, 2010 Year-on-year Change

Customer Assets (Overall Group) ¥43.8 trillion +12.0%

Assets under Management (Overall Group) ¥13.4 trillion +25.2%

Number of Accounts in “Daiwa Direct” Course 1,250 thousand +13.0%

daiwa securities group annual report 2010 13 To O u r S hareholders and I n v e s t o r s

[ Impact of the Dissolution of Joint Venture in the Wholesale Business ]

Q2. I think the biggest topic concerning FY2009 is the dissolution of the joint venture with the Sumitomo Mitsui Financial Group (hereafter, “SMFG”) in the wholesale business. What impact does this disengagement have ? A2. Although not without its demerits, I feel the positive side is greater. The resulting acceleration of decision-making speed and revitalization of the organization are also major positives.

Effect on Credit Rating Limited When considering the effects of the dissolution of the joint venture, it is crucial to analyze all aspects. First of all, clearly the largest advantage of a joint venture with a major bank is the support it provides to a company’s credit rating. There were moves among rating agencies to downgrade the Group’s credit rating immediately after the announcement of the dissolution in September 2009. However, several rating agencies have recently upgraded the outlook for the Group from “Negative” to “Stable.” As an indicator of financial health, shareholders’ equity as of March 13 , 2010 stood at ¥927.1 billion—representing a recovery to levels before the financial crisis—partly owing to an issuance of new shares last July. As of March 31, 2010, we also held an ample portfolio of liquidity amounting to approximately ¥2,350 billion. Moreover, the Group incurred no direct losses in relation to subprime loans, hence we maintain a robust financial base even in comparison with investment banks in the US and Europe. The rating agencies have surely recognized these factors as well.

Ratings Action Following Dissolution of Joint Venture

Date of Change Daiwa Securities Group Inc. Daiwa Securities Daiwa Securities CM

Nov 30, Baa2 (Negative) A2 (Credit Watch Negative) Moody's Baa1 (Stable) 2009 Baa2 (Stable) Baa1 (Stable)

Sep 11, BBB+ (Stable) A (Stable) S&P BBB+ (Stable) 2009 BBB (Stable) BBB+ (Stable)

Feb 5, A (Negative) A (Negative) A (Negative) R&I 2010 A (Stable) A (Stable) A (Stable)

Dec 28, A+ (Negative) A+ (Negative) JCR – 2009 A+ (Stable) A+ (Stable)

Nov 9. Fitch BBB+ (Negative)* – A– (Negative) 2009

* The rating Fitch gave Daiwa Securities Group Inc. was unsolicited ratings.

14 daiwa securities group annual report 2010 Some Positive Aspects for Business Secondly, in terms of real business, there were concerns about the impact of the dissolution on underwriting services in our wholesale operations. While of course not escaping all of the negative influence, the positive aspects for underwriting business are starting to seem more promi- nent, judging from developments since the dissolution of the joint venture. For example, Daiwa Securities Capital Markets Co. Ltd. (hereafter, D“ aiwa Securities CM”) served as joint lead manager in Japan for the Mitsubishi UFJ Financial Group’s primary and secondary equity offerings after the dissolution. Previously such a deal would have been very difficult forD aiwa Securities CM to take part in, partly because it held equity interest in a bank. Meanwhile, since the joint venture was dissolved, Daiwa Securities CM has continued to serve as lead manager of underwriting even for corporations whose main bank is Sumitomo Mitsui Banking Corporation. I believe this result is owed to the relationships of trust Daiwa Securities CM has forged with its corporate customers over the years, and to those customers’ recognition of the company’s true capabilities.

Reorganization of Overseas Businesses The Group has promoted organizational reshuffling since the dissolution of the joint venture, including the reorganization of its overseas businesses. Before the dissolution, the US operation was a subsidiary of Daiwa Securities Group Inc., because the US regulations prevented its inclusion in the joint venture with SMFG, Daiwa Securities SMBC (now Daiwa Securities CM). With the dissolution, Daiwa Securities Group Inc. transferred control of the Group’s US subsidiary to Daiwa Securities CM. This transfer consolidated the Group’s overseas wholesale operations under Daiwa Securities CM, thereby enhancing our global business structure.

Faster Decision-making and Reinvigorated Organization as Major Advantages The acceleration of decision-making speed and the rejuvenating effects on the organization are also significant benefits. By their very form, joint ventures inevitably restrict the freedom and speed of management decisions. Dissolving the joint venture removed these restrictions and enabled the Group to develop its operations more rapidly and with greater latitude. Further- more, I cannot say the reduction in personnel due to the dissolution has had no impact, but there is now that much more room for younger employees to blossom. The resulting boost to employee motivation has revitalized the organization.

daiwa securities group annual report 2010 15 To O u r S hareholders and I n v e s t o r s

[ Responding to Upcoming Changes in the Operating Environment ]

Q3. What is your view on the upcoming operating environment, and how do you intend to respond to it ? A3. I think the business environment within Japan will improve from its current state, but I am certainly not overly optimistic. I think it will be important to stimulate demand by offering attractive products and services, and to maintain a corporate structure that secures stable profits.

Foreseeing a Turnaround in the Operating Environment According to forecasts by Daiwa Securities CM’s Financial Research Center, the ordinary income for FY2010 of 300 major companies on the First Section of the Tokyo Stock Exchange will increase 45.8% year on year, and capital investment will recover, albeit gradually. Amid such conditions, the stock market is also expected to remain firm. These considerations point toward a refueling of the trend of Japanese individuals moving their assets “from savings to investment,” which had been decelerating in recent times.

Unleashing Demand through Attractive Solutions Despite the recent slow-down, the shift “from savings to investment” continues, and given that only about 13% of the ¥1,456 trillion in personal assets held by Japanese individuals is invested in securities products, there is certainly substantial potential investment demand. Therefore, I think it is important to provide attractive products and services to encourage that demand. In our wholesale business as well, it is essential to provide solutions that have customers saying, “This is just what I wanted.”

Building New Revenue Base Also Important It is also important to build a new revenue base. I think it is crucial to increase the stability of the Group’s earnings by reinforcing the foundation of our earnings through expansion of our overseas customer base and forays into new business fields.

16 daiwa securities group annual report 2010 [ Long-term Strategy Going Forward ]

Q4. Please be a little more specific about your growth strategy. What kind of products and services will you offer ? What type of new business developments are you considering ? A4. We will take the lead in providing what customers truly seek. Regarding business deployment, we intend to augment our presence in Asia and also enter the banking business.

Focusing on Offering Products and Services that Anticipate Customer Needs For our retail operations, it is important to provide what the customer truly seeks. On that point, the Group has been anticipating customer needs, and offering innovative and attractive products and services for some time. For instance, in 1986 we launched Japan’s first PC“ -based home trading service,” which was the forerunner of present-day Internet trading services. At Daiwa Securities, customers can freely choose between face-to-face asset management consultation with sales personnel, and transactions that customers conduct themselves via the Internet or through our call center. In particular, the non-face-to-face “Daiwa Direct” course not only has low commissions, it also lets customers take advantage of branch offices and research information. Furthermore, for its face-to-face “Daiwa Consulting” course, we launched wrap accounts as a discretionary asset management service in 2004, and currently control more than 40% of the market in terms of both the number of contracts and the balance of assets under management. In terms of offering attractive products, we have been focusing on sales of products for which customer demand is high, such as monthly-dividend-payment-type investment trusts that invest in foreign currency-denominated bonds and investment trusts that invest in stocks and bonds in emerging countries. Consequently, the cumulative net increase in the value of equity investment

Market Share in Wrap Account Service Cumulative Net Inflow in Equity Investment Trust AUM (%) (¥ billion) 50 1,500

40 1,000

30 500 20

0 10

0 -500 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar FY2007 FY2008 FY2009 FY2009 Share of number of contracts Share of contracted AUM Daiwa Securities Group* Company A Company B Source: Prepared by Daiwa Securities using materials from the Japan Source: The Investment Trusts Association, Japan Securities Investment Advisers Association * Daiwa Asset Management + Daiwa SB Investments

daiwa securities group annual report 2010 17 To O u r S hareholders and I n v e s t o r s

trusts at the Group’s asset management companies continues to surpass that of our competitors. Moreover, our engagement in sales promotions for overseas stocks early on has recently resulted in commissions from overseas stocks accounting for nearly 30% of Daiwa Securities’ total equity brokerage commissions. In November 2009, we augmented the “Daiwa Direct” course by launching “Daiwa 365FX” (FX margin trade on exchange) to appeal to active investors and expand market share by reducing brokerage fees, and we enriched our service selection through “Daiwa CFD” (contract for difference trading). In this way, we stay a step ahead of our competitors through initiatives to enhance convenience for our customers by developing products and services that anticipate their diversifying needs.

Making Asia Our “Home Market” and Entering the Banking Business Regarding new business deployment, first of all, we are engaged in a full-scale strengthening of our operations in Asia. The Group has put down roots over a long period in Asia—40 years in Hong Kong, 38 years in Singapore, and 27 years in Beijing—where we have supported local economic growth, securities market creation, and personnel cultivation. We also have the advantage of the interactions and relationships of trust we have built up over this long history with government-related entities, major corporations, and key people in each Asian country in which we have operations. The Group will leverage this competitive edge to channel management resources into these regions on a larger scale and with greater speed than ever before. Daiwa Securities CM has already placed the Hong Kong subsidiary as its second headquarters, and five executives lead the business in this region. We have also resolved to double the number of our personnel in Asia by the end of FY2011, and double the amount of capital at business sites in Asia and other overseas regions during FY2010. In this way, we aim to make Asia our “home market” by substantially boosting our presence in the region. By expanding sales in Japan of Asian stocks and investment trusts that include such stocks, the Group will be able to significantly strengthen its earnings structure. In addition, we are gearing up for entry into the banking business as a foray into a new field of operations. We have started a company tasked with preparing for the establishment of an Internet bank slated to commence operations in 2011. In coordination with its agent, Daiwa Securities, the new bank will provide even more attractive products and services to our customers.

18 daiwa securities group annual report 2010 [ Message to Stakeholders ]

Q5. Finally, what would you most like to convey to stakeholders at this time ? A5. FY2009 was a year of organizational reinforcement for the Daiwa Securities Group. Now is the time when we will mobilize the combined powers of the Group toward our business objectives and solidify our framework for sustained growth going forward.

TheD aiwa Securities Group has been providing products and services that anticipate customer needs. We have also constructed a robust network presence in Asia as part of our global business deployment. Now that we have dissolved our former joint venture and made a new start as a Daiwa Securi- ties Group reborn, we will tackle our business objectives with the full, united capabilities of the Group. We are committed to realizing sustained growth as one of the leading comprehensive financial services companies in Japan, as well as in Asia. I ask for your continued support in these endeavors.

July 2010

Shigeharu Suzuki, President and CEO Daiwa Securities Group Inc.

Corporate Philosophy of the Daiwa Securities Group

O Daiwa Securities Group’s mission is to contribute to the development of society and economy through daily operations, including wealth management and supporting corporate clients' activities.

O A strong trust from stakeholders including Customers, Shareholders, Employees and the Society is essential to accomplish our mission.

Corporate philosophy and stakeholders

Customers Shareholders

Building trust Maintaining healthy earnings results The trust and approval of customers forms the very foundation of the The Group will always seek to develop healthy business operations and Daiwa Securities Group. The Group will always place the needs of cus- to increase corporate value for the benefit of shareholders. By provid- tomers first, and strive to develop the advanced, specialized skills to ing customers with attractive products and services, the Daiwa Securi- offer them the most attractive products and services of any securities ties Group will seek to generate strong profits and healthy returns for group. shareholders. 大和証券グループ Daiwa Securities Group

Employees Society

Placing importance on personnel Contributing to society The source of the Group’s competitiveness lies in the capabilities of The Daiwa Securities Group will seek to benefit the economy and society its employees. The Group will promote the creativity of employees through the development of healthy financial markets. In addition to scrupu- by offering them a challenging and self-directed working environ- lously observing both regulations and internal policies, the Group will strive ment that encourages their abilities and appropriately rewards to maintain a high sense of morality and duty, endeavoring to continue con- their contributions. tributing to the sustainable growth of the societies in which we operate.

daiwa securities group annual report 2010 19 Message from the CFO

“The Daiwa Securities Group will achieve sustained growth through efficient capital allocation while maintaining a sound financial base.”

Nobuyuki Iwamoto Corporate Executive Vice President and CFO, Daiwa Securities Group Inc.

Q1. How solid is the Group’s financial base at this point ?

In July 2009, we procured approximately ¥200 billion through our first issuance of shares to raise capital in 20 years. Amid calls for financial institutions in each country to improve their financial foundations since the global financial crisis, theG roup has significantly reinforced its financial base through this public offering. Specifically, as of March 13 , 2010, consolidated shareholders’ equity (owners’ equity + valuation and translation adjustments) stood at ¥927.1 billion and total liquidity portfolio at approximately ¥2,350 billion, underscoring the Group’s abundant capital and liquidity. Moreover, the adjusted leverage ratio* remained at a healthy level just below 10 times as of March 31, 2010. Going forward, we will maintain a stable financial base while monitoring economic concerns in Greece and other European countries as well as watching out for trends toward tighter financial regulations.

* (Total assets – Assets related to gensaki trading (repurchase agreements) and repo operations) / Net assets

Q2. The Group’s credit rating was downgraded after the dissolution of the joint venture with the Sumitomo Mitsui Financial Group. Has the downgrade had any impact on fund procurement costs or subsequent business deployment ? How do you think the Group can improve its rating in the future ?

The downgrade has not had a notable impact on fund procurement costs as of now. Although there were some temporary effects on trading immediately following the downgrade, there has been little impact on other areas of operations. Furthermore, there have been no changes in our underwriting business, partly because we enjoyed favorable relationships with the companies of the former Sumitomo Group starting from before commencing the joint venture. The independence has in fact brought benefits, including a substantial increase in the Group’s market share of underwriting for the Mitsubishi UFJ Financial Group’s public offering in December 2009, compared with the market share during the joint venture. Moving forward, ratings will focus more on future earning power than on the Group’s financial foundation. Therefore,I believe we must solidify our revenue base, for example, strengthening our operations in Asia and otherwise restructuring our business model.

20 daiwa securities group annual report 2010 Q3. Are there enough funds available to boost capital at overseas business sites as the Group expands its operations in Asia ?

We intend to inject a total of approximately ¥100 billion in capital into overseas business sites to bolster our operations in Asia. However, since part of the funds procured in the public offering mentioned above will be allocated to this capital increase, no additional capital-raising is required at this point. The planned geographical breakdown of the capital injection is 46¥ billion for Hong Kong (of which, ¥18 billion has already been issued), ¥4 billion for Singapore, ¥6 billion for India and ¥12.5 billion for South Korea (of which, ¥2.5 billion has already been issued). We also plan to increase capital in the United Kingdom by ¥35 billion through the setup of subordinated loans, to boost derivatives trading in Asia. (All capital figures are approximate.)

Q4. From the beginning of the year, concerns about a financial crisis in Greece and other European countries have grown. How much risk does the Group bear in relation to investments in that region ?

Although we hold several hundred million yen in sovereign bonds on our trading account, the impact on earnings is extremely minor because the bonds are properly recorded at fair value.

Capital Injection Plan for Overseas Business Sites (as of July 2010)在）

Hong Kong Singapore India

¥59.0 billion

+¥18.0 billion +¥28.0 billion (already injected) ¥10.0 billion ¥9.0 billion ¥31.0 billion +¥4.0 billion ¥6.0 billion +¥6.0 billion

¥3.0 billion

March 31, 2010 After capital March 31, 2010 After capital March 31, 2010 After capital strengthening strengthening strengthening

South Korea United Kingdom

¥81.5 billion

+¥35.0 billion

¥15.5 billion ¥46.5 billion * Each capital figure is an approximation +¥2.5 billion calculated based on the foreign exchange rate (already injected) +¥10.0 billion prevailing on March 31, 2010. * For the United Kingdom, a subordinated loan ¥5.5 billion amount is to be set up.

March 31, 2010 After capital March 31, 2010 After funded by strengthening subordinated loan

daiwa securities group annual report 2010 21 Special Feature

Racing to Make Asia Our Home Market

The Daiwa Securities Group aims to strengthen its operating base in Asia on a larger scale and with greater speed than ever before, to become one of Asia’s leading comprehensive financial services companies.

22 daiwa securities group annual report 2010 Why is Now the Time for Asia ?

E Expanding Transactions with Rapidly Growing Asian Corporations E Making Asia’s Ongoing Economic Growth an Investment Target for the Assets of Japanese Individuals

GDP Comparison Breakdowns of Household Financial Assets —Asia Gearing up to Match the US—

($ trillion) (%) 20 100 4.3% 3.5%

80 27.3% 28.9% 15

60 13.1% 10 40 53.3%

55.2% 5 20 14.3% 0 0 05 06 07 08 09 10 11 12 13 14 15 Japan US (Year) US Asia (excluding Japan) Cash and deposits Shares, equities, bonds, and investment trusts Source: IMF, World Economic Outlook (April 2010) Insurance and pension reserves Others Source: Flow of Funds (4th Quarter of 2009) –Japan and US Overview– Note: Figures calculated by the IMF by the Bank of Japan

Connecting the finance needs of corporations with the asset expected to stimulate corporate stock offerings, capital increases, management needs of investors is the Group’s most important and M&A activity, thereby promising greater business opportuni- mission and the mainspring of its growth. ties in the Group’s wholesale business. Despite ongoing economic uncertainty in Europe, the global Another significant aspect of the accelerating economic devel- economy is on a recovery path following the financial crisis. More- opment in Asia is the attractiveness of investing in the region. over, the veritable drivers of this recovery are China, India, and Among Japan’s ¥1,456 trillion in personal assets*3 as of December other emerging countries, rather than the advanced countries. 31, 2009, 55.2% is in cash and deposits.*3 In contrast, the majority According to the IMF’s World Economic Outlook*1, the GDP of personal assets in the US are in the form of shares, equities, growth rate of the G7 countries will be limited to between 2.0% bonds, and investment trusts*3. We believe that Asia’s ongoing and 2.5% in 2010 and for the medium term. In contrast, continued rapid growth represents an ideal opportunity for investors in high growth is anticipated for China and 25 other emerging coun- Japan to shift from savings, which earn very low interest rates, to tries in Asia, from a growth rate in these countries of 6.6% in 2009 investment. We intend to achieve sustained growth of the Group to anticipated growth of 8.7% in both 2010 and 2011. Consequently, by providing the means to engage in such investments. the GDP for Asia (excluding Japan)*2 is projected to nearly triple in *1 IMF, World Economic Outlook (April 2010) *2 Total of 30 economies, including 4 Newly Industrialized Asian Economies and the ten-year period through 2015, from less than half of that for 26 Developing Asian Economies in the IMF World Economic Outlook *3 Flow of Funds (4th Quarter of 2009)–Japan and US Overview–by the Bank of Japan the US in 2005, to match the US level. Asia’s economic growth is

daiwa securities group annual report 2010 23 Special Feature

What are the Prerequisites for Success in Competition ?

E An Existing Strong Network Presence in Asia E Preeminent Product Sales and Development Capabilities

Daiwa Securities Group’s Network in Asia Trading Value in China / Hong Kong and India Stocks at Daiwa Securities Tokyo Beijing Repre- (headquarters) sentative Office (¥ billion) 80 Est.: Sep 1983 Seoul Branch Est.: Dec 1982 Shanghai Representative Office (Daiwa SSC Securities)） 60 Hong Kong Est.: Aug 1986 (second headquarters) Taiwan subsidiary Est.: Dec 1970 Est.: Jul 1993 40 Hanoi Representative Office Philippines subsidiary Est.: Oct 2007 Est.: Mar 1995 Bangkok 20 Mumbai subsidiary Representative Est.: Feb 2006 Office Est.: Jan 2006 0 1Q 2Q 3Q 4Q Singapore subsidiary FY2009 Est.: Jun 1972 China / Hong Kong India

Although fierce competition is expected as many financial institu- Daiwa Securities, which operates our retail business, is handling tions focus on the business expansion in Asia, we are confident that an increasing amount of overseas stocks, foreign currency- the Group will prevail. One reason for this confidence is the strong denominated bonds, and notably emerging market stocks and network presence we have already established in Asia. Starting with bond funds. Our trading value of overseas stocks surpassed the establishment of its Hong Kong office in 1970, the Group has ¥150 billion in the fourth quarter of FY2009, with stocks of expanded by opening offices inS ingapore, Seoul, Beijing, Shanghai, companies in China, Hong Kong, and India accounting for Taipei, Manila, Bangkok, and Mumbai, for a total of nine business approximately ¥80 billion of the total. As a result, equity bro- sites in Asia. In addition to playing a leading role in the develop- kerage commissions for overseas stocks rose to constitute nearly ment of each country’s offshore market, we have served as lead 30% of the total amount of equity brokerage commissions. Sales manager for numerous large-scale IPOs and POWLs*1 for Chinese of foreign currency-denominated bonds also expanded, reaching firms. We have also built close relationships with major corpora- approximately ¥400 billion in the fourth quarter of FY2009. tions, government entities, and industrial conglomerates in local Moreover, Daiwa Asset Management and Daiwa SB Invest- regions. Particularly in the case of China, we are the only Japanese ments, which represent the Group’s asset management arm, are corporation to have a joint venture securities company in the coun- parlaying their superior research and asset management capabili- try, and in FY2009 we were the first Japan-based securities firm to ties into the development of products that invest in emerging solely lead-manage an IPO*2. countries. They have established a reputation particularly in the Furthermore, our major competitive edges in providing invest- arrangement and management of monthly-dividend-payment- ment products targeting Asia are our sales capabilities rooted in type bond funds and stock funds. The two companies’ cumulative an abundant customer base and our product development skills net increase in the equity investment trust assets in FY2009 far that take advantage of the Group’s integrated abilities. surpasses that of their competitors.

*1 Public Offering Without Listing *2 Please refer to Daiwa Securities Capital Markets’ Topics section on page 39 for details. 24 daiwa securities group annual report 2010 Action for Making Asia Our Home Market

E Substantially Augmenting Human Resources and Capital E Leveraging Resources within the Group to Expand Revenues

Personnel Expansion in Asia and Oceania Capital Enhancement Plan for Overseas Sites

(# of employees) (¥ billion) 1,200 Approx. 1,120 200 Approx. ¥190 billion

900 150

Approx. 650 Approx. 600 100 ¥90 billion

300 50

0 0 Sep 2009 Mar 2012 Sep 2009 During FY2010 (target)

The dissolution of the joint venture with the Sumitomo Mitsui management. In particular, the company stationed the heads of both Financial Group has enabled speedier and more flexible execution its global equity sales and global investment banking businesses in of decision-making and coordination among the Group compa- Hong Kong, from which they manage operations across Asia. nies. We are also now able to promote revisions to our operational Next, we will assign some 300 additional personnel to Asian and geographic portfolios at unprecedented speeds, especially the stocks, derivatives, and other market-related operations. We also conversion of our business in the US to a subsidiary of Daiwa plan to add roughly 100 investment banking personnel. In addi- Securities Capital Markets (hereafter, “Daiwa Securities CM”). tion, we will strengthen back office personnel and increase the total To capitalize on this timing to substantially bolster its business number of personnel in Asia and Oceania from around 650 people platform in Asia, the Group will channel management resources as of September 30, 2009, to about 1,120 people by March 31, 2012. into the region faster and on a grander scale than ever before. We will also boost capital with the business expansion. We To start off, Daiwa Securities CM designated its Hong Kong sub- intend to double the total amount of capital at overseas business sidiary as its “second headquarters” after its Tokyo headquarters sites from approximately ¥90 billion to approximately ¥190 billion office. The company assigned five executives, led by its representative during FY2010. deputy president, to all of Asia to head up local operations by direct

daiwa securities group annual report 2010 25 Special Feature

Recent Major Underwriting Deals as Lead Manager in Asia EarningsEarnings Performance Performance and and Targets Targets (Including Jointly Lead-managed Deals) inin Asia Asia and and Oceania Oceania

Target figures for China High (¥(¥ billion) billion) Target figures for Asia business Nov 09 Precision IPO US$148 million 6060 Asia business expansion strategy Automation expansion strategy (¥53(¥53 billion) billion) Nov 09 Hongrun Construction Bond RMB500 million Earnings image in China 5050 Earnings image in Asia and Oceania China Automation Asia and Oceania May 09 PO US$37 million Group 4040 May 08 China Taisan IPO US$42 million

Tong Yang Life Oct 09 IPO Won340 billion 3030 Insurance

South Oct 09 Industrial Bank of Korea Bond ¥26.2 billion Korea 2020 Sep 09 Korea Development Bank Bond ¥30 billion Jan 08 Hyundai Capital Services Bond ¥47 billion 1010 India Oct 09 Patel Engineering PO US$75 million Philippines Feb 10 Republic of the Philippines Bond ¥100 billion 00 Thailand May 08 The Kingdom of Thailand Bond ¥55 billion 20062006 2007 2007 2008 2008 20092009 20102010 2011 2011(FY)(FY) Performance Targets Indonesia Jul 09 Republic of Indonesia Bond ¥35 billion Performance Targets

Furthermore, within the next three years we aim to elevate Through such initiatives, the Group endeavors to increase Daiwa Securities CM’s global market division into the “top five earnings in Asia and Oceania from approximately ¥14 billion in Asian brokers” and its global investment banking division into FY2009 to ¥53 billion in FY2011. Moreover, through coordination the “top ten in the league tables” for equity capital markets. with our retail and asset management businesses in Japan, we Results already obtained include, in the second half of FY2009, intend to lift sales of stocks, bonds, and investment trusts target- our serving as overseas joint book-runner for the IPO of South ing Asia to new heights, and translate this sales increase into Korea’s “Tong Yang Life Insurance Co., Ltd.” and joint book- stronger earnings for the Group overall. runner for the IPO of Hong Kong’s “China High Precision Auto- mation Group Ltd.”

26 daiwa securities group annual report 2010

Review of Operations p28 at a Glance p30 in the Industry p32 retail p36 wholesale p40 investment p42 asset Management p46 Systems and Research

daiwa securities group annual report 2010 27 R e v i e w o f O p e r at i o n s At a Glance: Core Business Segments of the Daiwa Securities Group

Retail

Ordinary Income

(¥ billion) 120

101.0 The Group’s retail securities firm boasts a top-class customer base in

Japan, to which it provides a wide range of financial products and ser- 80 74.4 71.0 vices, mainly to individual investors and unlisted companies. One of the company’s advantages in the retail market is its ability to provide custom- 7.3

ers with two in-house customer service courses. Its “Daiwa Consulting” 40.4 40 course provides access to sales personnel that offer high value-added services, while its “Daiwa Direct” course provides highly convenient online 18.3 brokerage services.

0 05 06 07 08 09 (Fiscal year)

Wholesale

Ordinary Income

(¥ billion) 200 141.5

With a global network based on domestic and overseas operating offices, 100 92.8 68.7 the Group’s wholesale securities firm‘s customer base comprises Japanese and foreign institutional investors, business corporations, and financial ser- 1.4 vices companies. The company offers a broad range of services to suit the 0 needs of its customers, including sales and trading, investment banking, and research. -100

-200 -167.4 05 06 07 08 09 (Fiscal year)

Investment

Daiwa PI Partners makes selective investments in such areas as monetary Daiwa Corporate Investment operates venture capital, buyout investment claims and private equity. and investment funds that focus on Asia.

28 daiwa securities group annual report 2010 Asset Management

Ordinary Income Daiwa Asset Management Daiwa SB Investments (¥ billion) (¥ billion) Acting as the core of the Group’s asset management operations, Daiwa 20 10 Asset Management establishes and manages a multitude of investment 17.4 trusts with various investment targets or investment themes. The company 8 15 markets them through wide-ranging sales channels, such as the branch 13.0 office networks of Daiwa Securities and third-party banks. 11.6 6 5.7 9.9 10 4.6 4.4 4 2.9 3.1 5 4.4 The asset management company, whose capital is provided by the Daiwa 2 Securities Group and the Sumitomo Mitsui Financial Group, offers pension fund management and other services for institutional investors in Japan 0 0 and overseas. The company also develops and manages investment trusts 05 06 07 0908 (Fiscal year) 05 06 07 0908 (Fiscal year) for retail investors.

Systems and Research

Ordinary Income*

(¥ billion) 15 13.3

9.7 10 9.1 7.9 7.3

5 The Daiwa Institute of Research Group provides systems support and research services through an intermediary holding company, Daiwa Insti- tute of Research Holdings. Daiwa Institute of Research provides services to Group companies, while Daiwa Institute of Research Business Innovation 0 (Fiscal year) takes the lead in providing services to clients outside the Daiwa Securities 05 06 07 08 09 * Combined ordinary income for the three companies Group. (Excluding in-group transactions and dividend from subsidiaries)

Group Support

Daiwa Securities Business Center provides office administration services, Daiwa Property provides property management services for the Group as primarily to Daiwa Securities and Daiwa Securities Capital Markets. well as real estate solutions and appraisal services for corporate clients.

daiwa securities group annual report 2010 29 R e v i e w o f O p e r at i o n s In the Industry Market Shares of Core Business Segments

Retail

Wrap Account Service Number of Online Trading Accounts*1 Number of Contracts (March 31, 2010) (March 31, 2010)

45.1% 18.6%

Prepared by Daiwa Securities using materials Prepared by Daiwa Securities using publicly from the Japan Securities Investment Advisers announced corporate materials. Association.

*1 Represents the market share of Daiwa Securities’ “Daiwa Direct” course out of a total of six online trading services, including the five major online trading special- ists—SBI Securities, Rakuten Securities, Matsui Securities, Monex Securities, and Kabu.com Securities.

Asset Management

Publicly Offered Investment Trusts Increase in Net Assets of Publicly Offered Assets Under Management*2 Equity Investment Trusts (excluding ETFs)*2 (March 31, 2010) (FY2009)

17.2% 31.6%

Prepared by Daiwa Securities Group Inc. using Prepared by Daiwa Securities Group Inc. using materials from the Investment Trusts Associa- materials from the Investment Trusts Associa- tion, Japan. tion, Japan.

*2 Daiwa Asset Management + Daiwa SB Investments

30 daiwa securities group annual report 2010 Wholesale

M&A Advisory Total Equity*3 Lead Manager (FY2009, Japanese corporation-related publicly announced deals) League Tables (FY2009)

22.9% 17.4%

Prepared by Daiwa Securities Capital Markets Prepared by Daiwa Securities Capital Markets. based on Thomson Reuters Markets.

Total Debt*4 Lead Manager Total Yen Bond Lead Manager League Tables League Tables (FY2009) (FY2009)

17.8% 20.3%

Prepared by Daiwa Securities Capital Markets. Prepared by Daiwa Securities Capital Markets based on Thomson Reuters Markets.

*3 Total equity: Primary and secondary equity offerings (including foreign equity) + domestic CB + overseas CB + IPO + REIT *4 Total debt: Straight bonds + agency bonds + samurai bonds + municipal bonds + Japan Housing Finance Agency RMBS

daiwa securities group annual report 2010 31 R e v i e w o f O p e r at i o n s Retail

E Two Main Service Courses, Diverse Range of Products and Services Built on Comprehensive Capabilities

To meet the varying needs of retail customers more effectively, Daiwa Securities has developed two main service courses— “Daiwa Consulting,” a service in which sales personnel offer high value-added support, and “Daiwa Direct,” which offers a convenient service accessible via a call center and the Internet. The company’s competitive edge in the retail market comes from having developed three in-house sales channels—comprising a nationwide network of 119 branch offices*, a call center, and the Internet—and making optimal use of the Daiwa Securities Group’s infrastructure and resources. Another of the company’s strengths is an enhanced product and service lineup that provides full coverage for the varying needs of customers. The lineup includes domestic and foreign equities, bonds and investment trusts, as well as services, such as pension insurance, wrap account services, and securities-backed loans. * As of July 1, 2010

Business Structure of Daiwa Securities (as of July 1, 2010)

Switchable

The “Daiwa Consulting” Course The “Daiwa Direct” Course

Asset management support services tailored to Client can conduct transactions at their own convenience meet each customer’s needs through a call center or via the Internet

Daiwa’s cash management service (deposits and withdrawals, balance calculation and reports, settlement services, asset management) Basic Service e-Member*1, management fee discount for qualifying accounts, Daiwa’s mileage program

Branch office (open accounts, various clerical procedures, ATMs, seminars) (Common for Call center (request documents, make inquiries) Service Locations both courses) Internet (access investment information, check account balance, conduct transactions, obtain other information)

Domestic stocks, “mini” stock trading, monthly stock investment plan ("Ruito"), overseas (Common for stocks, JGBs, corporate bonds, foreign currency-denominated bonds, investment trusts, both courses) pension insurance, “Daiwa FX,” “Daiwa 365FX,” “Daiwa CFD,” “Daiwa PTS,” “Daiwa Net Loan” Products & Services “Daiwa SMA,” “Daiwa Fund Wrap,” “OTC stock option trading,” “Daiwa SAT (stock and trust) Loan”

Investment Advice Investment consultation with staff at the branch office

Brokerage Commissions Internet IVR*3• Internet At branch office Call center in Domestic Stocks*2 (PC and mobile phones) (PC and mobile phones)

Cash Trading 100 75 70 30 or flat fee*4

Margin Trading 100 —

Transaction fees less than ¥500 thousand : Margin Trading Service ¥150 including tax 70 more than ¥500 thousand : ¥300 including tax or flat fee

*1 Reports on trading history or trading information can be accessed by the client from their PC *2 Figures indicate a percentage, where the fee charged to “Daiwa Consulting” customers when conducting transactions at a branch office is equal to 100% *3 Interactive Voice Response *4 Daily flat rate

32 daiwa securities group annual report 2010 Earnings Results for FY2009 1. Review of Operating Environment and Business Results

E Performance Makes Steady Recovery despite Uncertain Business Environment

In FY2009, the average daily trading value on the First Section of the Tokyo Stock Exchange dropped 23.4% year on year, stagnating at the low level of ¥1,529.7 billion. On the other hand, primary and secondary equity offerings rose to the highest levels in the past 10 years. Under these operating conditions, Daiwa Securities made a steady recovery in performance in FY2009. Among commissions, distribution Investment Trust Agency Commissions commissions jumped 2.1 times from the previous fiscal year because of (¥ billion) increased equity finance deals and expanded sales of equity funds.A lthough 4 investment trust agency commissions declined 11% year on year, they have rallied on a quarterly basis since the Lehman Shock. As a result, net operating revenues increased 21.6% year on year, to ¥192.0 billion. Ordinary 3 income soared 119.9% year on year, to ¥40.4 billion.

2. Business Performance and Achievements 2

E Firm Signs of Growth in Customer Base

The basic approach of Daiwa Securities is to concentrate on “increasing the 1 balance of customer assets” because this in turn leads to stable income that provides the basis for sustained growth. In equity investment trusts, “Daiwa 0 Foreign Bond Fund (Daiwa Spirit),” which the company started to sell in 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2007 FY2008 FY2009 July 2009, was well received by customers and consequently recorded steady (Average monthly commissions by quarter) growth in assets under custody. Customers appreciated the fund’s goal of combining stability and profitability through a diversified portfolio consisting of investment in the bonds of advanced countries with high credit ratings and the high-yield bonds of emerging nations. “Daiwa Brazil Stock Wrap Account Service Contract AUM and Open-end Fund (Wind of Rio de Janeiro)” also contributed to growth in Market Share (¥ billion) (%) 300 45 customer assets. This fund invests in the high-growth potential equities of Brazil, which are expected to perform well in light of expectations for the country’s hosting of the 2016 Summer Olympics. Sales of foreign equities also increased, particularly sales of Chinese, 200 30 Indian, and Brazilian equities. Since introducing its Wrap Account business, including the discretionary investment services “Daiwa SMA” and “Daiwa Fund Wrap,” the company has consistently been No. 1 in the industry in this service area. In 100 15 both contract assets under management (AUM) and number of contracts, Daiwa Securities holds more than a 40% share of the market. Daiwa Securities is expanding its branch office network to increase its points of direct contact with customers. The company opened the Fuchu 0 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Branch Office in September 2009, upgraded Tokorozawa Station Plaza to FY2007 FY2008 FY2009 Wrap account service contract AUM the Tokorozawa-ekimae Branch Office in November, and opened the Sag- Market share of AUM in wrap account service amihara Branch Office, its11 9th branch office, in March 120 0. In June 2010, Sources: Japan Securities Investment Advisers Association; compiled by Daiwa Securities the company relocated the Sapporo Branch Office to the Hokuyo-Odori Center to make access more convenient for customers.

daiwa securities group annual report 2010 33 R e v i e w o f O p e r at i o n s

Key Strategies for FY2010 Daiwa Securities’ performance goal within the Daiwa Securities Group’s “Passion for the Best” 2011 medium-term management plan is to achieve ordinary income of ¥120 billion by FY2011. The company is taking the following measures in FY2010 to attain that goal.

1. “Daiwa Consulting” Division Strategies Foreign Equity Trading Value E Expanding Customer Base by Further Enhancing Products and Services (¥ billion) The consulting division is aiming to further expand its customer base by 180 enhancing its products and services by taking into consideration varying

customer needs. 150 One example of this strategy is a product called “Impact Investment.” This represents a new type of investment that not only seeks to earn a return 120 on investment, but also strives to make a contribution to solving such social challenges as poverty and the environment—which has recently drawn a 90 lot of attention. Daiwa Securities was the first in Japan to sellI mpact Invest- ment products, such as “Vaccine Bonds” and “Microfinance Bonds,” and 60 continues to build its record in this area. Currently*, Daiwa Securities holds an overwhelming 71% share for selling foreign currency-denominated 30 bonds related to Impact Investment. This record reflects the high regard of 0 many foreign issuers such as international institutions for the Daiwa Secu- 4Q 1Q 2Q 3Q 4Q FY2008 FY2009 rities Group’s long dedication in selling foreign bonds in Japan. As a new China & Hong Kong India Brazil Others (North America, etc.) form of investment, demand for Impact Investment is expected to grow. Accordingly, Daiwa Securities is looking to further increase its presence in this area. In its foreign equity sales, Daiwa Securities is aggressively promoting investment in the stocks of high-growth potential markets in Asia and emerging nations, such as China, India, and Brazil. Strengthening its collaboration with Daiwa Securities Capital Markets, the company intends to build upon its performance record in this market through such actions as enhancing its coverage and provision of market information. In the investment trust business, Daiwa Securities’ focus is to continue implementing measures to expand the balance of customer assets. In response to customers’ strong need for income distribution type products, the company has extended its lineup of periodical-dividend-payment-funds and consequently offers a wider selection.I n addition, the company launches new funds on a timely basis in response to the market environment. In its other services, such as pension insurance, wrap account services, and securities-backed loans, Daiwa Securities is targeting further market expansion through enhanced services. * As of June 2010

2. “Daiwa Direct” Division Strategies

E Strengthening Sales Approach for Active Investors

The D“ aiwa Direct” division’s strategy is to supplement its traditional customer base by taking steps to attract a greater number of active investors. As part of this strategy, the division introduced two new services in FY2009, “Daiwa 365FX” and “Daiwa CFD*1.”

34 daiwa securities group annual report 2010 “Daiwa 365FX” is FX margin trade on exchange where the company offers theT okyo Financial Exchange (TFX), Inc. “Click 365” product. Commencing in February 2010, the company began aggressively promoting “Daiwa 365FX” using a discounted commission campaign, resulting in customers of Daiwa Secu- rities accounting for more than 10% of the trading value in “Click 365.” In August 2010, the company plans to launch “Daiwa’s Trading Board 365FX” on a commission-free basis, aiming to further expand its share of FX margin trade on exchange, which has growth potential. “Daiwa CFD” is an OTC net-settlement transaction based on contract for difference C( FD). The company began offeringN ihon 225 index futures CFDs (JP225xx) in October 2009, followed by Japanese equities CFDs (approx. 100 stocks coverage) in May 2010. In addition, Daiwa Securities boosted trading convenience for its customers by adding mobile phone trading services to its existing online trading services for “Daiwa 365FX” and “Daiwa CFD.” Among other measures, Daiwa Securities introduced a substantial reduction in brokerage fees*2 for its “Margin Transaction Service” on “Daiwa Direct” starting in July 2010. The company also upgraded D“ aiwa Trading Board” to a new version to create an enhanced trading environment for active investors. Daiwa Secu- rities is committed to continue improving the transaction speed and user-friendliness of its trading system. *1 CFD (contract for difference): A transaction in which the two parties agree to settle a trade based on the price difference of a stock, stock index, or other investment instrument between the beginning and end points of the contract without requiring actual purchase or sale of the financial instrument. *2 Stock brokerage fees for Internet-based orders in which the buy or sell is made via PC or mobile phone, including the Interactive Voice Response (IVR) service provided by the call center.

TOPICS —The Daiwa Securities Group Prepares to Enter the Banking Business

With a planned launch in 2011, the Daiwa Securities Group is preparing to enter the banking business. Daiwa Securities will play a core role as the main provider of the business base, including sales capabilities and infrastructure, in its capacity as an agency for the new bank. The new bank will aim to expand its customer base and profits by offering high-interest bearing deposits at a low cost through the Internet, as well as using the branch offices and call center of its banking agency, Daiwa Securities. In addition, we will provide a unified service between the deposit accounts offered by the new bank and the cash management service accounts of Daiwa Securities using the company’s “Sweep Service”—automatic fund transfer and settlement services. By linking the customer’s bank accounts and securities accounts, Daiwa Securities will increase customer convenience, and further enhance and differentiate the Group’s services.

Customers of new bank Customers of Daiwa Securities

Applying for opening of Soliciting opening of Applying for opening of new bank accounts new bank account new bank accounts Identification, Soliciting deposits, Identification, Receiving deposits Receiving deposits Receiving deposits

New bank Banking agency (Daiwa Securities)

Internet Transfers Internet Branch offices Call center (PC) (“Zengin” system) (PC and mobile phones)

Bank account Cash management accounts

Fixed deposits, etc. Stocks, bonds, investment trusts, etc. Transfers Automated transfer system Savings account Deposits Daiwa MRF (Sweep Service)

daiwa securities group annual report 2010 35 R e v i e w o f O p e r at i o n s Wholesale

E Pursuing “Quality” Products and Services

The services offered by Daiwa Securities Capital Markets (hereafter, “Daiwa Securities CM”) are in all cases closely related to improving the business results, competitiveness, or other performance aspects of its corporate customers. As a result, in addition to practicing good customer relations, it is important that the company be able to provide solutions based on detailed information and show strong execution capabilities in steadily implementing its proposals. Daiwa Securities CM pursues “quality” in the products and services it offers by taking advantage of such resources as collaborations with Daiwa Securities, which handles retail operations, or its top ranked research capabilities. Various third-party evaluations have recognized these strengths. In addition to ranking highly in league tables, Daiwa Securities CM received Best Deal awards in the four categories of lead manager of samurai bonds, primary and secondary equity offerings, and yen bonds as well as in M&A advisory in the “Euromoney Japan Awards 2009.”

Earnings Results for FY2009 1. Review of Operating Environment and Business Results

E Sharp Recovery in the Equity Finance Market

The most notable point about the business environment in FY2009 was the recovery in the equity finance market. Up until FY2008, the total amount of primary and secondary equity offerings in Japan had declined for three consecutive years. However, in FY2009, total equity offerings surged to more than ¥6 trillion, hitting the highest level in 10 years. The recovery in the market can be attributed to an increase in the number of companies having to repair financial positions that suffered from the financial crisis, which led to a rush to increase capital. In comparison, although Japan’s stock market showed signs of recovery, it lagged behind the strong resurgence of growth in markets of emerging countries. Under these conditions, Daiwa Securities CM’s consolidated ordinary income rebounded from a loss of ¥167.4 billion, moving back into the black at ¥68.7 billion. Among operating revenues, underwriting commissions jumped 2.9 times year on year, reflecting the recovery in the equity finance market, while net gain on trading posted a gain of ¥59.4 billion compared with a ¥4.7 billion loss in FY2008. Furthermore, net gain on private equity and other investments also moved back into the profit column, supported by the gain on sale of Sanyo Electric Co., Ltd. shares, scoring a gain of ¥89.8 billion in FY2009 compared with a loss of ¥75.1 billion a year earlier.

2. Business Performance and Achievements

E Four Major Reforms for Future Growth

(1) Dissolve the joint venture with the Sumitomo Mitsui Financial Group Following the dissolution of the 10-year joint venture with the Sumitomo Mitsui Financial Group (hereafter, “SMFG”), Daiwa Securities CM got a new start as an independent investment bank on January 1, 2010. The dissolution had no great impact on operations, with Daiwa Securities CM leveraging its strengths as an independent company to win new deals one after the other.

36 daiwa securities group annual report 2010 (2) Establish a structure to develop M&A business covering Asia including Japan, the US, and Europe In July 2009, Daiwa Securities CM acquired Close Brothers Corporate Finance (Holdings) Limited (hereafter, “CBCF”), an independent investment bank specializing in the M&A advisory business in Europe. CBCF boasts a particularly strong presence in the market for medium-sized mergers. With this acquisition, Daiwa Securities CM is aiming to win and successfully conclude cross-border M&A deals for Japanese corporations and boost its execution capabilities. In May 2010, CBCF changed its name to “Daiwa Corporate Advisory Partners Limited.” With this change, Daiwa Securities CM completed the establishment of a global M&A structure covering Japan, Asia, the US, and Europe.

(3) Enhance Daiwa Securities CM’s research capabilities Daiwa Securities CM has newly established within its organization the “Financial Research Center,” to which it has transferred securities analysts and strategists from the Daiwa Institute of Research. By assem- bling this elite research team, which has been ranked top by the Institutional Investor magazine for two consecutive years, Daiwa Securities CM plans to make even greater use than before of the research team’s high-quality information and analysis capabilities to expand brokerage revenues.

Institutional Investor “2010 All-Japan Research Team” Ranking for each participating company (based on number of analysts ranked)

Rank Company Score

1 Daiwa 24

1 Nomura 24

3 UBS 21

4 Mitsubishi UFJ 16

5 Citi 13

5 J.P.Morgan 13

7 Credit Suisse 9

7 Goldman Sachs 9

9 Deutsche Securities 8

9 Mizuho 8

(4) Reorganize the global network Daiwa America Corporation was previously not able to become a subsidiary of Daiwa Securities CM because of restrictions under the US law regarding banks and joint ventures of banks. After the dissolution of the joint venture with SMFG, however, Daiwa America Corporation was transferred by Daiwa Securities Group Inc. to Daiwa Securities CM, becoming a wholly owned subsidiary renamed as “Daiwa Capital Markets America Inc.” With this move, Daiwa Securities CM has established a broad network covering Japan, Asia, the US, and Europe, making the company truly a global investment bank.

daiwa securities group annual report 2010 37 R e v i e w o f O p e r at i o n s

Major Lead-managed Deals and Publicly Announced M&A Deal Advisory in FY2009 (including co-lead-managed deals)

Primary and secondary equity offerings (including CBs) Sumitomo Mitsui Financial Group Global public offering Total ¥1,932.5 billion Mitsubishi UFJ Financial Group Global public offering ¥1,070.0 billion Toshiba Public offering ¥333.0 billion T&D Holdings Domestic public offering ¥124.0 billion NEC Global public offering ¥123.6 billion

Corporate straight bonds Sumitomo Mitsui Banking Corporation (including subordinated bonds) Total ¥329.0 billion Softbank Total ¥185.0 billion Tokyo Electric Power Total ¥155.0 billion Sharp Total ¥150.0 billion

Other bonds European Investment Bank (EIB) Euro global bonds B 2.75 billion European Bank for Reconstruction and Development (EBRD) US dollar global bonds US$1.5 billion United Mexican States (JBIC guarantee) Samurai bonds ¥150.0 billion

Agency bonds Japan Housing Finance Agency Total ¥173.7 billion Japan Expressway Holding and Debt Repayment Agency Total ¥130.0 billion Japan Finance Corporation Total ¥90.0 billion

Structured finance Total ¥450.0 billion (issue) Japan Housing Finance Agency, Secured Pass-through Bonds Nos. S-14, 16, 18 Total ¥156.0 billion (underwriting) Total ¥331.0 billion (issue) Japan Housing Finance Agency, Secured Pass-through Bonds Nos. 26, 28, 29, 31, 33 ¥103.8 billion (underwriting) ¥100.0 billion (issue) Nippon Life Insurance, First SPC Series 1 Collateralized FILP Bonds for “2009 Fund” ¥45.0 billion (underwriting)

M&A Merger between Nippon Mining Holdings and Nippon Oil Corporation Adviser to Nippon Mining Holdings Merger between NEC Electronics Corporation and Renesas Technology Corp. Adviser to NEC Electronics Corporation Merger between The Kagawa Bank and The Tokushima Bank Adviser to The Kagawa Bank

Key Strategies for FY2010 Daiwa Securities Capital Markets’ performance goal within the Daiwa Securities Group’s “Passion for the Best” 2011 medium-term management plan is to achieve ordinary income of ¥60 billion by FY2011. The company is taking the following measures in FY2010 to attain that goal. 1. Asia as Our Home Market

E Unprecedented Speed and Scale of Human and Capital Resources Investment

Daiwa Securities CM aims to become a “high-quality world-class investment bank that represents Asia.” Specifically, the company has set itself the goals of becoming one of “Asia’s top five equities brokers” in the global markets category, and one of the “top ten in the equity capital markets league tables” in the global investment banking category. To achieve these goals, the company is expanding its business base with unprecedented speed and on a greater scale than ever before. Already five executives with titles run- ning up to deputy president are working at the company’s Asian bases. Under this management team, Daiwa

38 daiwa securities group annual report 2010 Securities CM plans to increase overseas staff by up to 400 people over about the next two years and to quickly enhance its IT infrastructure as well. Moreover, during FY2010, Daiwa Securities CM will expand the capital of is overseas bases, mainly in Asia, to approximately ¥190 billion. In FY2009, the company already increased the capital of its subsidiary in Hong Kong by ¥18 billion and the subsidiary in South Korea by ¥2.5 billion.

* For further details of the company’s strategies, please see the special feature “Racing to Make Asia Our Home Market” on pages 22 to 26 of this report.

2. Strengthening the Existing Business

E Strategic Expansion of Products and Services with a Competitive Edge

Besides aiming to expand business in Asia, Daiwa Securities CM is implementing the following measures to strengthen its existing business. (1) Further boosting the company’s reputation as a broker Daiwa Securities CM is endeavoring to attract new customers and expand earnings by further boosting its reputation as a broker. To that end, the company is focusing on providing high-quality information to customers from the Financial Research Center and on strengthening its relationship with customers. In March 2010, Daiwa Securities CM hosted the largest ever investment conference in Japan attended by domestic and foreign institutional investors. The conference was extremely well received by Japanese and foreign participants.

(2) Upgrading product attractiveness and strengthening collaboration with Daiwa Securities Daiwa Securities CM aims to provide products that accurately reflect changes in market conditions and in the needs and risk preferences of customers. In addition to JGBs, corporate bonds, and other traditional investment instruments, the company offers a variety of other products, such as foreign corporate straight bonds, asset-backed securities, and structured bonds, for both Japanese and foreign customers. Going forward, Daiwa Securities CM intends to expand earnings by strengthening its collaboration with Daiwa Securities, which has 119 branches* nationwide and approximately 3.3 million cash management service accounts. * As of July 1, 2010

TOPICS —Full-scale Start to IPO Underwriting Business in Asia

“Daiwa SSC Securities Co., Ltd.,” a joint venture established by Daiwa Securities CM and Shanghai Securities Co., Ltd. in 2004, is Japan’s only joint venture securities company in China. As such, it was the first Japanese joint venture securities company in China to become the sole lead manager of an IPO in that country. The issuer was “Shanghai Conant Optics Co., Ltd.,” a lens manufacturer previously listed on the Shenzhen Stock Exchange’s “ChiNext board” (Chinese version of Nasdaq), which provides a market for start-up companies. Daiwa SSC Securities under- wrote the new shares, sold them to local investors, and also plans to support the listing company’s investor relations program and any secondary financing. Other than China, Daiwa Securities CM also acted as lead manager of an IPO by Tong Yang Life Insurance Co., Ltd. in South Korea. Through such efforts, Daiwa Securities CM is utilizing its operating base in the Asian region to steadily grab a share of the exploding demand for IPOs by start-up companies.

daiwa securities group annual report 2010 39 R e v i e w o f O p e r at i o n s Investment

The predecessor of Daiwa PI Partners, Daiwa Securities SMBC Principal Investments, had been one of Japan’s leading investment companies since its inception in 2001, investing in such fields as private equity, monetary claims, and real estate. In February 2010, the former Daiwa Securities SMBC Principal Investments transferred its assets to a newly established Daiwa Securities SMBC Principal Investments, which then changed its name to Daiwa PI Partners. With this reorganization, Daiwa PI Partners became a wholly owned subsidiary of Daiwa Securities Group.

Basic Growth Strategies Building upon a wealth of investment experience and know-how developed by its predecessor, Daiwa Securities SMBC Principal Investments, Daiwa PI Partners is investing in monetary claims, private equity, and other areas based on its investment themes of revitalizing Japan and supporting growth in Asia. The company makes its investment decisions based on strict standards and aims to make investments that will contribute to growth or revitalization of the investee company. Daiwa PI Partners is also actively involved in the management of such funds as the Daiwa Quantum Fund, striving to achieve a stable earnings structure while also offering investors attractive investment opportunities.

TOPICS —Daiwa Quantum Capital Launches First Fund

On October 30, 2009, Daiwa Quantum Capital launched its first fund, “Daiwa Quantum Capital Partners I, L.P.” Daiwa Quantum Capital is a joint venture of Daiwa PI Partners and Quantum Leaps Corporation, the Founder and CEO of which is Mr. Nobuyuki Idei, the former CEO of Sony. The concept of the fund is to make growth investments that will support Asian companies operating environmental or energy conservation businesses as well as consumption-related businesses and the growth of Japanese companies which invest capital and knowledge resources in such Asian companies, while mutually increasing the corporate value of all involved in the long term.

Outline of Daiwa Quantum Capital Partners I, L.P.

Investment target Growth investment in Asian companies, including Japan Target area of investment Asia (excluding Japan) approximately 75% / Japan approximately 25%

Fund size US$80 million (as of October 30, 2009), continuing expanding fund size

40 daiwa securities group annual report 2010 Investment

(Name changed from Daiwa SMBC Capital effective on July 1, 2010)

Following the dissolution of the venture capital company jointly established by the Daiwa Securities Group and the SMFG, Daiwa Corporate Investment became a wholly owned subsidiary of the Group. Even before the forming of the joint venture, the predecessor of Daiwa Corporate Investment utilized know-how developed through the long-term operation of a venture capital business to support the growth of many ventures and help them list their shares. With an investment analysis team specializing in the IT and life science fields, Daiwa Corporate Investment features its business support system for helping growth of its investee companies.

Basic Growth Strategies In FY2009, there continued to be no signs of the market bottoming out. There were only 19 IPOs in Japan, five of which involved the formerD aiwa SMBC Capital. Given the strong possibility of a full-scale recovery in the market requiring a certain amount of time, Daiwa Corporate Investment will take advantage of its accumulated knowledge and know-how to pursue such growth strategies as increasing its buyout business or expanding its fund management business in Asia.

TOPICS —Launch of Unlisted Equity Fund Investing in Vietnamese Companies

Since 2008, the Group has been developing its Vietnam-related business in a strategic partnership with a major local securities company in Viet- nam, Saigon Securities Inc. In 2009, the Group launched a fund that invests in unlisted Vietnamese companies with high-growth potential in collaboration with a subsidiary of Saigon Securities, SSI Asset Management Ltd. With notable high-growth potential even compared with other countries in the Asian region, Vietnam has quickly pressed forward with the establishment of platforms for trading shares of unlisted companies, such as Unlisted Public Companies (UPCOM) Market in Hanoi. Daiwa Corpo- rate Investment plans to achieve strong performances in this fund, while expanding the scale of its investment funds targeting Asia.

daiwa securities group annual report 2010 41 R e v i e w o f O p e r at i o n s Asset Management

E Fund Management Capabilities Underpinned by Enhanced Research and Risk Management Systems

In an environment where investor demand for investment trust products is rapidly diversifying, emerging country equity funds and foreign bond funds are particularly popular. Daiwa Asset Management’s advantage in this market is its already well-seasoned global research team and ability to manage almost all of these types of funds in-house. By making the structure of its fund as simple as possible and the risks easy to understand, the company has earned the trust and support of investors and sales agents.

Earnings Results for FY2009 1. Review of Operating Environment and Business Results

E Holding the Largest Share of Increase in Net Assets in the Industry

In FY2009, assets under management in the domestic investment trust Daiwa Asset Management: industry expanded because of an increase in the net inflow of funds along Assets Under Management of Publicly Offered Equity Investment Trusts with the recovery in stock prices and a rising risk tolerance among investors. (¥ trillion) 12 In FY2009, the increase in net assets (excluding ETFs) of publicly offered equity 10 investment trusts throughout the industry amounted to ¥4,838.3 billion. Under these market conditions, Daiwa Asset Management worked to 8 accurately respond to intensifying investor needs by launching monthly- 6

dividend-payment-type bond funds as well as emerging country equity and 4 bond funds. Reflecting these efforts, the company achieved an increase in net 2 assets totaling ¥918.9 billion. This performance represented a 19.0% share of 0 overall increase in net assets, the largest share in the Japanese industry. As a 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2008 FY2009 result, Daiwa Asset Management’s assets under management in its publicly Publicly Offered Equity Investment Trusts (excluding ETFs) ETFs Publicly Offered Bond Investment Trusts offered equity investment trusts (excluding ETFs) totaled ¥5,742.4 billion at the end of FY2009, advancing from ¥4,156.1 billion in FY2008, and accounting for a 11.5% share of the domestic market. Although the company strongly pursued a full recovery in both the first and the second half of FY2009, after hitting bottom in the second half of FY2008 under the dramatic impact of the financial crisis, operating revenues for FY2009 declined 6.4%, to ¥63.7 billion, and ordinary income slid 14.5%, to ¥9.9 billion.

2. Business Performance and Achievements

E Results of Product Development Addressing Investor Needs and Sales Channel Expansion Efforts

(1) Launch of Large-scale Funds In FY2009, Daiwa Asset Management launched two funds, the “Daiwa Foreign Bond Fund (monthly- dividend-payment-type)—Daiwa Spirit” and the “Daiwa Brazil Stock Open-end Fund—Wind of Rio de Janeiro,” which grew to large-scale funds, each with assets under management in excess of ¥100 billion. “Daiwa Spirit” was well received by customers because of the fund’s special characteristic of combining steady growth and stable incomes through diversified investment in the bonds of advanced countries and

42 daiwa securities group annual report 2010 Major Investment Funds Launched in FY2009 (FY2009 year-end balance of ¥30 billion or more)）

Fund Name Launch Date Assets (¥ billion)

Daiwa Rogers International Commodity TM Fund Apr 23, 2009 38.9

Daiwa Foreign Bond Fund Mar 12, 2009* (monthly-dividend-payment-type) 352.4 (Jul 23) —Daiwa Spirit— Daiwa Brazil Stock Open-end Fund Nov 25, 2009 117.6 —Wind of Rio de Janeiro— Daiwa India, Brazil, and China—National Infrastructure- related Stock Fund Jan 29, 2010 32.2 —Design of the Future— Daiwa Support Japan Fund Feb 19, 2010 39.3 —Renovators in Japan—

* Independently established on March 12, 2009, transferred to sales subsidiary as of July 23, 2009. emerging countries. As a result, the fund has developed into one of the Group’s core products. “Wind of Rio de Janeiro,” which invests in the high-growth potential stocks of Brazil, is also popular backed by the country’s hosting not only of the 2014 FIFA World Cup, but also its recent winning of the 2016 Summer Olympics.

(2) Expansion of Sales Channels Daiwa Asset Management made great progress with sales channel expansion in FY2009. In particular, the “Brazil Bond Open-end Fund” (monthly settlements), which invests in relatively high yield Brazilian real-denominated bonds and other income instruments, was popular with the customers of banks, resulting in expansion in the number of bank sales agency channels.

Key Strategies for FY2010 Daiwa Asset Managements’ performance goal within the Daiwa Securities Group’s “Passion for the Best” 2011 medium-term management plan is to achieve ordinary income of ¥15 billion by FY2011. The company is taking the following measures in FY2010 to attain that goal.

1. Strengthening Investment Management and Product Development Capabilities

E Continuing to Launch Large-scale Funds

In FY2010, Daiwa Asset Management expects that Japanese investors will continue to want to invest in overseas assets. By strengthening its hiring of analysts in local markets and its global research and investment management organization, the company will continue to develop such products as emerging country equity and foreign bond funds. Strengthening global management capability will increase Daiwa Asset Management’s ratio of in-house management and lead to heightened trust among investors.

2. Enhancing Customer Support Services

E Marketing Focused on Demand from Sales Agencies

Daiwa Asset Management plans to further strengthen its support for core sales agency companies. The company will offer optimum products in line with the sales strategies of each sales agency companies. By directly collecting information from sales agencies, Daiwa Asset Management will develop products that suit the diversifying needs of investors.

daiwa securities group annual report 2010 43 R e v i e w o f O p e r at i o n s Asset Management

E Top-Class Reputation and Performance in Pension Management

With approximately 60% of its assets under management handled under investment advisory contracts, Daiwa SB Invest- ments has established a particularly strong position in pension fund management. The company has earned high ratings from customers in “Newsletter on Pensions and Investments” published by the Rating & Investment Information, Inc. (R&I). In the investment trust business, Daiwa SB Investments has employed its extensive know-how in pension fund management to develop and manage fund products. The company also has a business alliance with a major US-based fund management company T. Rowe Price Group that allows it to manage funds and conduct research on a global basis.

Earnings Results for FY2009 1. Review of Operating Environment and Business Results

E Edging Up Revenues by Increasing Publicly Offered Investment Trusts Assets

Reflecting a mild improvement in investment sentiment among investors, there was a net inflow of funds in publicly offered investment trusts in particular, supporting a 5.7% year-on-year increase to ¥20.5 billion in operating revenues, and 6.9% growth to ¥3.1 billion in ordinary income, both well above last year’s levels. At March 31, 2010, Daiwa SB Investments’ assets under management amounted to ¥4,554 billion, climbing 33.2% year on year. Of this amount, the investment advisory assets posted year-on-year growth of 14.4% because of a net inflow of funds from other sectors and valuation gains from the rebound in stock prices, despite the outflow of funds related to the portfolio rebalancing carried out by Japanese and foreign public institutions. In contrast, the assets under management held in publicly offered investment trusts soared 63.7% year on year. The growth in investment trust assets can be attributed to a large net inflow of funds driven in particular by inflow to foreign currency-denominated bond funds.

2. Business Performance and Achievements

E Expanding the Product Lineup and Sales Channels while Maintaining Investment Funds Management Capabilities

(1) Improving Fund Management Capabilities and Expanding and Daiwa SB Investments: Enhancing Product Lineup Trends in Assets Under Management der the leadership of the newly established “Investment Strategy Division,” Un (¥ trillion) Daiwa SB Investments took steps to improve its fund management capabili- 6 ties by strengthening its top-down management functions and its decision- 5

making processes. 4

In the “2009 Survey of Pension Customers’ Evaluations of Asset Man- 3 agement Companies” published in R&I’s “Newsletter on Pensions and 2 Investments,” Daiwa SB Investments was ranked number one in the “Over- 1 all Assessment category,” which considers overall performance in terms of 0 such factors as fund management capabilities and information disclosure. 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2008 FY2009 In other areas, the company made progress with expanding its product lineup Investment advisory Publicly offered equity investment trusts by creating such products as an Asian equity fund for institutional investors. Privately offered investment trusts

44 daiwa securities group annual report 2010 (2) Enhancement of Publicly Offered Investment Trust In FY2009, Daiwa SB Investments newly launched five funds. The company’s efforts to develop and expand its sales agency company network for existing funds also bore fruit, supporting a substantial increase in net inflow of funds. Based on Daiwa SB Investment’s progress with sales channel development, the number of sales agency companies increased 23.5% year on year.

Key Strategies for FY2010 Daiwa SB Investments’ performance goal within the Daiwa Securities Group’s “Passion for the Best” 2011 medium-term management plan is to achieve ordinary income of ¥5 billion by FY2011. The company is taking the following measures in FY2010 to attain that goal.

E Focusing on Product Development and Fund Management in Line with Market Conditions and Customer Needs

Daiwa SB Investment will continue to pursue its goals of “strengthening fund management capabilities,” “expanding the range of fund management products,” “strengthening the operating base,” and “improving risk management and operating efficiency.” In FY2010, in particular, the company has positioned strengthening Asian asset management as a priority strategy and will target further reinforcement of Asian equities management and research organizations.

TOPICS 1 —Full-scale Entrance into the Real Estate Asset Management Business

On July 1, 2009, Daiwa Securities Group Inc. acquired all the shares of K.K. daVinci Select Holdings, the asset management company of DA Office Invest- ment Corporation (hereafter, “DAO”), and took on a third-party allotment by DAO. In conjunction with this action, the name of daVinci Select was changed to “Daiwa Real Estate Asset Management.” The acquisition of this company brings a J-REIT asset management company under the umbrella of the Daiwa Securities Group, and the Group has entered the real estate asset management business. Going forward, the Group will utilize its capital procurement capabilities to strengthen DAO’s financial position. In addition, the Group will leverage its real estate-related information to the fullest in acquiring suitable properties, aiming to establish a system that ensures the continued supply of superior real estate investment products to the market.

TOPICS 2 —Entrance into Asset Management Business in India

On March 29, 2010, Daiwa Asset Management and Daiwa Securities Group Inc. announced that they would acquire from Shinsei Bank Limited and other shareholders all the shares of Shinsei Asset Management (India) Private Limited (hereafter, “SAMI”), which conducts an asset management business in India, and of Shinsei Trustee Company (India) Private Limited (hereafter, “STC”). SAMI and STC will become wholly owned subsidiaries of the Daiwa Securities Group subject to necessary approval from regulatory authorities and the central bank in India. The Group has two major goals in making these acquisitions. One goal is to make an entrance into the rapidly growing Indian domestic asset management business. The other goal is to enable Japanese investors to participate in the high growth of India’s economy by reinforcing and enhancing the Group’s product supply capability.

daiwa securities group annual report 2010 45 R e v i e w o f O p e r at i o n s Systems and Research

DaiwaE Top-Class Institute Reputation of Research and Holdings Performance is the intermediary in Pension Management holding company, whose main operations are handled by Daiwa

WithInstitute over of 60% Research of its assets(hereafter, under “DIR”) management and Daiwa handled Institute under of investment Research Businessadvisory Innovationcontracts, Daiwa(hereafter, SB Investments “DIR BI”). has DIR establishedand DIR BI a provide particularly research, strong consulting, position in and pension IT systems fund management.support services. The company has earned high ratings from custom- ersIn in addition the Rating to &supplying Investment companies Information in the (R&I) Daiwa Newsletter Securities on PensionsGroup with and macroeconomic Investments. In theresearch investment information trust business, and IT Daiwasystems SB support, Investments DIR has is responsibleemployed its forextensive synthetic know-how consulting in pension services fund for management the Group. to Its develop research and division manage carriesfund prod- out ucts.research The and company analysis also of hasthe a economies,business alliance markets, with and a majorindustries US-based of Japan fund andmanagement other countries company utilizing T. Rowe a globalPrice Groupnetwork. that allowsGroup itcompanies to manage distribute funds and theconduct results research of those on effortsa global asbasis. investment information for their own use and for the use by customers. Based on professional knowledge and experience, DIR’s consulting division proposes solutions for a wide variety of applications, including management strategies, business evaluations, personnel systems, and financial strategies, and supports the implementation of the proposed solutions. The IT systems division provides Group companies with total system services, covering building, maintenance, and operations for an information system so large in scale that it could be termed social infrastructure. The division’s responsibilities include system engineering, maintenance, and operations. DIR BI operates an information system business, providing system consulting, IT system integration, and other services to customers outside the Daiwa Securities Group.

Basic Growth Strategies E Daiwa Institute of Research

Based on its accumulated research know-how, the research division will redouble its efforts to offer reports that are highly assessed by the market. The division will also promote its suggestion of activities aimed at stimulating the financial and capital markets, with the goal of increasing the company’s presence in the market. In addition, to support the Daiwa Securities Group’s drive to strengthen its Asian business, the division plans to expand its research organization and make progress in enhancing the quality of its work regarding the capital markets and macroeconomics of China, India, and other countries in Asia. The consulting division will strengthen its support activities, particularly for Daiwa Securities CM’s investment banking operations. For that purpose, the division will increase its collaboration within the Group, reinforce its operating base, enhance its services, and push forward with proposals for investment business in Asia. The IT systems division will strengthen its cooperation with Group companies, such as through the creation of a system for the Group’s Internet bank aimed to begin operations in FY2011. The division will also build global systems for SOR*, derivatives, foreign exchange, and other trading systems as well as an overseas companies network. Pursuing greater cost efficiency, the division will “promote development of in-house middle–back office systems”, “optimization of the scale and location related to data center functions,” and “reduction of system building costs and time.” * Smart Order Routing

E Daiwa Institute of Research Business Innovation

In order to achieve sustainable business growth, DIR BI plans to build stronger relationships with its customers as well as to strengthen its competitiveness by expanding its product lineup and enhancing its consulting services. Moreover, DIR BI will work to reinforce its business base by improving the quality of IT system development and operating services as well as by implementing business reforms to boost cost effectiveness.

46 daiwa securities group annual report 2010 Management Systems and CSR Activities

p48 top Management p58 risk Management p50 corporate Governance p62 Financial Strategy p52 corporate Governance Committee System p63 Human Resource Management p53 compliance p66 cSR Initiatives p54 it Strategy and Information Security p56 Disclosure

daiwa securities group annual report 2010 47 Management S ystems and c s r A c t i v i t i e s Top Management

Directors Executive Officers

Chairman of the Board Shigeharu Suzuki Shin Yoshidome President and CEO Deputy President and COO Akira Kiyota Head of Retail (Representative) President, Daiwa Securities Head of Wholesale Co. Ltd. President, Daiwa Securities Directors Capital Markets Co. Ltd. Shigeharu Suzuki Shin Yoshidome 1971 Joined Daiwa Securities Co. Ltd. 1974 Joined Daiwa Securities Co. Ltd. 199 director, Chief Corporate Institutions Officer 2000 deputy Head of Nagoya Branch, Daiwa SBCM Co. Ltd. Takashi Hibino 1998 Managing Director (currently Daiwa Securities Capital Markets Co. Ltd.) 200 senior Managing Director 200 executive Officer Makoto Shirakawa 2002 senior Managing Director, Daiwa Securities SMBC Co. Ltd. 200 senior Executive Officer (currently Daiwa Securities Capital Markets Co. Ltd.) Managing Director 2003 representative Senior Managing Director 200 director and Corporate Executive Nobuyuki Iwamoto 200 director, President and CEO, Vice President, Daiwa Securities Group Inc. daiwa Securities Group Inc. representative Senior Managing Director, Takatoshi Wakabayashi Head of Retail daiwa Securities SMBC Co. Ltd. president, Daiwa Securities Co. Ltd. (currently Daiwa Securities Capital Markets Co. Ltd.) Kazuo Oda 200 director, Deputy President and COO, (Representative) daiwa Securities Group Inc. Head of Wholesale Saburo Jifuku president, Daiwa Securities SMBC Co. Ltd. Tetsuro Kawakami Ryuji Yasuda Takashi Hibino Makoto Shirakawa Deputy President Deputy President Koichi Uno Deputy Head of Wholesale Deputy Head of Retail Deputy President, Daiwa Deputy President, Daiwa Nobuko Matsubara Securities Capital Markets Co. Ltd. Securities Co. Ltd. Keiichi Tadaki

1979 Joined Daiwa Securities Co. Ltd. 1978 Joined Daiwa Securities Co. Ltd. 2002 Head of Corporate Planning Department, 2003 Head of Financial Institutions Dept. I daiwa Securities Group Inc. daiwa Securities SMBC Co. Ltd. executive Officer, Daiwa Securities SMBC Co. Ltd. (currently Daiwa Securities Capital Markets Co. Ltd.) (currently Daiwa Securities Capital Markets Co. Ltd.) 200 executive Officer, Daiwa Securities Co. Ltd. 200 senior Executive Officer, Daiwa Securities Group Inc. 2006 Managing Director director and Corporate Senior Executive Officer 200 senior Managing Director 200 director and Corporate Executive Vice President 2009 deputy President, Daiwa Securities Group Inc. 2008 deputy Head of Wholesale deputy Head of Retail senior Managing Executive Officer, deputy President, Daiwa Securities Co. Ltd. Daiwa Securities SMBC Co. Ltd. 2010 director and Deputy President, Daiwa Securities Group Inc. 2009 director and Deputy President, Daiwa Securities Group Inc. deputy Head of Wholesale deputy President, Daiwa Securities SMBC Co. Ltd.

Masaki Shimazu Toshiro Ishibashi Deputy President Deputy President Deputy Head of Retail Head of Asset Management Deputy President, Daiwa President, Daiwa Asset Securities Co. Ltd. Management Co. Ltd. Chairman of the Board, Daiwa Securities SMBC Principal Investments Co. Ltd. Chairman of the Board, Daiwa PI Partners Co. Ltd.

1976 Joined Daiwa Securities Co. Ltd. 1973 Joined Daiwa Securities Co. Ltd. 2003 deputy Head of Fund Management Division, 1998 director, Chief Investment Banking Officer Daiwa Asset Management Co. Ltd. 1999 executive Officer, Daiwa SBCM Co. Ltd. executive Officer (currently Daiwa Securities Capital Markets Co. Ltd.) 200 executive Officer,D aiwa Securities Co. Ltd. 2003 Managing Director, Daiwa Securities Co. Ltd. 2005 Managing Director 200 senior Managing Director 200 representative Senior Managing Director 200 representative Senior Managing Director 2010 deputy President, Daiwa Securities Group Inc. 2008 director and Deputy President, deputy Head of Retail daiwa Securities Group Inc. deputy President, Daiwa Securities Co. Ltd. deputy President, Daiwa Securities Co. Ltd. chairman of the Board, Daiwa Securities SMBC 2009 deputy President, principal Investments Co. Ltd. daiwa Securities Group Inc. chairman of the Board, Daiwa PI Partners Co. Ltd. Head of Asset Management president, Daiwa Asset Management Co. Ltd.

48 daiwa securities group annual report 2010 Executive Officers

Takashi Fukai Nobuyuki Iwamoto Takatoshi Wakabayashi Deputy President Corporate Executive Vice Corporate Executive Vice Head of Research President and CFO President and CRO President, Daiwa Institute of Chief Planning/ Representative Senior Research Holdings Ltd. Personnel Officer Managing Director, President, Daiwa Institute of Daiwa Securities Capital Research Ltd. Markets Co. Ltd. President, Daiwa Institute of Research Business Innovation Ltd.

1978 Joined Daiwa Securities Co. Ltd. 1980 Joined Daiwa Securities Co. Ltd. 1980 Joined Daiwa Securities Co. Ltd. 2001 Head of Kobe Branch 2001 Head of International Finance Department, 200 Head of Personnel Department and Assistant to Head of 2002 executive Officer daiwa Securities SMBC Co. Ltd. Planning, Daiwa Securities Group Inc. 2005 Managing Director (currently Daiwa Securities Capital Markets Co. Ltd.) 200 corporate Executive Officer 200 senior Managing Director 200 corporate Executive Officer and CFO, chief Legal Officer, Deputy Chief Personnel Officer and Head 2009 director and Deputy President, Daiwa Securities Group Inc. Daiwa Securities Group Inc. of Personnel Department deputy Head of Retail 200 director and Corporate Executive Officer 200 executive Officer, Daiwa Securities SMBC Co. Ltd. deputy President, Daiwa Securities Co. Ltd. 2008 director and Corporate Senior Executive Officer (currently Daiwa Securities Capital Markets Co. Ltd.) 2010 deputy President, Daiwa Securities Group Inc. 2009 director, Corporate Executive Vice President and CFO, 2008 senior Executive Officer Head of Research daiwa Securities Group Inc. 2009 representative Managing Director president, Daiwa Institute of Research Holdings Ltd. chief Planning/Personnel Officer 2010 director, Corporate Executive Vice President and CRO, president, Daiwa Institute of Research Ltd. daiwa Securities Group Inc. president, Daiwa Institute of Research Business Innovation Ltd. representative Senior Managing Director, daiwa Securities Capital Markets Co. Ltd.

Kazuo Oda Keiko Uehara Toshihiro Matsui Corporate Senior Executive Corporate Executive Officer Corporate Executive Officer Officer and CIO Head of Corporate Deputy Chief Planning/ Managing Director, Communications Personnel Officer Daiwa Securities Capital Markets Co. Ltd. Senior Managing Director, Daiwa Institute of Research Ltd.

1976 Joined Daiwa Securities Co. Ltd. 1982 Joined Daiwa Securities Co. Ltd. 1985 Joined Daiwa Securities Co. Ltd. 199 Head of Corporate System Development Department, 2007 Head of Education and Training Department 2008 Head of Corporate Planning Department, daiwa Institute of Research Ltd. 2009 corporate Executive Officer, Daiwa Securities Group Inc. daiwa Securities Group Inc. (currently Daiwa Institute of Research Holdings Ltd.) Head of Corporate Communications 2009 corporate Executive Officer 1999 advisor chief Legal Officer 2002 executive Officer deputy Chief Planning Officer 200 senior Executive Officer Head of Corporate Planning Department 200 senior Managing Director 2010 deputy Chief Planning/Personnel Officer 2008 representative Senior Managing Director, Daiwa Institute of Research Ltd. 2009 director, Corporate Senior Executive Officer and CIO, daiwa Securities Group Inc. senior Managing Director, Daiwa Institute of Research Ltd. 2010 Managing Director, Daiwa Securities Capital Markets Co. Ltd.

Tetsuo Akuzawa Akira Kiyota Corporate Executive Officer Corporate Executive Officer Chief Legal Officer Deputy Chief Personnel Officer Head of Secretariat Office Head of Personnel Department

1985 Joined Daiwa Securities Co. Ltd. 1969 Joined Daiwa Securities Co. Ltd. 2008 Head of Personnel Department, Daiwa Securities Group Inc. 199 director, Deputy Head of Sales Division, and Head of East 2010 corporate Executive Officer Division chief Legal Officer 1997 Managing Director deputy Chief Personnel Officer representative Managing Director Head of Secretariat Office deputy President Head of Personnel Department 1999 president, Daiwa SBCM Co. Ltd. (currently Daiwa Securities Capital Markets Co. Ltd.) 200 D eputy Chairman of the Board and Corporate Executive Officer, daiwa Securities Group Inc. chairman of the Institute, Daiwa Institute of Research Ltd. 200 director, Daiwa Institute of Research Ltd. 2008 chairman of the Board and Corporate Executive Officer, daiwa Securities Group Inc.

daiwa securities group annual report 2010 49 Management S ystems and c s r A c t i v i t i e s Corporate Governance

The Daiwa Securities Group is committed to creating a highly transparent and objective corporate governance system consistent with international standards. We clearly separate the supervisory and executive functions of management and maximize each Group company’s independence and expertise while establishing a Group management structure that highlights synergies between the Group companies.

Features of the Corporate Governance System selection standards for the appointment of directors. These standards In 1999, the Daiwa Securities Group became the first listed Japanese include criteria that help ensure the independence of outside direc- company to adopt a holding company structure. Since then, we have tors. The Audit Committee met 12 times during FY2009. The com- been pursuing a highly transparent and objective corporate gover- mittee evaluated the activities of directors and executive officers, nance framework that maximizes synergy between Group compa- focusing mainly on their efforts to implement an auditing structure nies while showcasing the independence and unique expertise of and internal control systems. The Compensation Committee met each Group member. four times in FY2009 to discuss compensation policy and determine In June 2004, the Group made the transition to a “Committee Sys- the compensation of each director, and also studied a Group-wide tem” of corporate governance and accelerated the decision-making incentive plan aimed at improving consolidated earnings results. process by transferring a substantial portion of authority from the The Board of Directors met 13 times during FY2009 and outside Board of Directors to the executive officers.I n addition, we strength- directors had an approximately 98% record of attendance. ened the supervisory functions of management by increasing the number of outside directors and establishing the Nominating Com- Executive Compensation More Closely Linked to mittee, Audit Committee, and Compensation Committee. The repre- Performance sentative directors of major Group companies also serve as executive Compensation for directors and executive officers is determined by officers of the holding company, thereby allowing them to efficiently the Compensation Committee, in principle. It generally has three implement individual business strategies based on Group strategies. components: basic compensation, performance-based compensation, The Nominating Committee met five times in FY2009 to discuss and stock-price-linked compensation. Criteria used in calculating the composition of the Board of Directors and its effect on corporate performance-based compensation include financial results, such as governance, the basic policy for nominating candidates for director- consolidated ordinary income and ROE, as well as other factors such ships, and the selection of these candidates. The Nominating Com- as which of the management goals outlined in the medium-term mittee selects candidates for directorships in light of the Group’s management plan have been met. We discontinued the retirement

Corporate Governance System

Shareholders’ Meeting Nominating Committee, 6 members Audit Committee, 4 members Compensation Committee, 5 members (including 4 outside directors) (including 3 outside directors) (including 3 outside directors)

Sets policy for compensation of Board of Directors, 14 members Nominates directors for selection, or Audits the activities of directors and directors and executive officers, (including 5 outside directors) recommends dismissal executive officers and determines compensation amount for each Basic management policy

Executive Committee, 14 members

Group-wide business strategy and Internal Control Committee Disclosure Committee Group IT Strategy Committee management issues, important financial matters Determines scope of consolidated financial Develops and oversees internal control, reports, scope of evaluation of internal Prepares original IT investment budget, risk control and internal auditing control reports and disclosure of evaluates and monitors IT investments systems important information Representative Executive Officer

50 daiwa securities group annual report 2010 benefit system for directors at Daiwa Securities Group Inc., Daiwa of internal control activities. The frequency and extent of audits are Securities, and Daiwa Securities CM to strengthen the correlation determined on a case-by-case basis, following an evaluation of risks with business performance and to enhance the transparency of exec- and other factors. The Internal Audit Department at the holding utive compensation. company regularly communicates with the internal auditing departments of major Group companies, and thereby coordinates efforts to Internal Control System upgrade the Group’s internal control and internal auditing systems. TheD aiwa Securities Group defines four internal control objectives: pro- In the case of Daiwa Securities Group Inc., internal auditing plans moting “business effectiveness and efficiency,” “reliable financial report- and the results of internal audits are reported to and approved by the ing,” “compliance with laws related to business activities,” and “asset Internal Control Committee, a subcommittee of the Executive Com- preservation.” The Group is building an extensive internal control sys- mittee. The auditing plans and results for majorG roup companies are tem to ensure that these processes function effectively and efficiently. reported to and approved by committees such as the Legal Affairs Internal auditing departments have been established at major and Compliance Committee. The Internal Audit Department at the Group companies to carry out internal audits. In addition, the Internal holding company also reports the results of internal audits to the Audit Department, which is under the direct control of the CEO of Audit Committee. Daiwa Securities Group Inc., audits Group companies that do not The Audit Committee conducts audits in collaboration with the have their own internal auditing departments. Internal Audit Department and, when necessary, can ask the Internal The Group’s internal auditing departments undertake regular Audit Department to research the items required to conduct the audits based on predetermined auditing plans, and verify the status audits.

Compensation Paid to Directors and Executive Officers in FY2009

Directors Executive Officers Total

Amounts based on Recipients Amount Recipients Amount Recipients Amount resolution of the Compen- sation Committee 8 persons ¥118 million 16 persons ¥880 million 24 persons ¥998 million

Notes: 1. The above compensation amounts include performance-based compensation. 2. The above compensation amounts include a total of ¥96 million in stock acquisition rights granted as stock options to directors and executive officers. 3. Compensation paid to the five outside directors totaled ¥79 million. 4. Eight directors also served as executive officers; their total compensation is included in the “Executive Officers” category.

“Internal Control Report System” to Govern Finan- teams at all of the major Group companies and solicited feedback and cial Disclosure Activities recommendations from outside advisors. The efforts were organized In FY2008, the government introduced legislation, under the Finan- into four main categories—control of Group companies, oversight of cial Instruments and Exchange Law, which requires management to Group IT activities, control of business processes, and verification submit reports on the internal control system used to oversee financial measures—each of which was overseen by a separate working group. reporting. The objective of this regulation is to support the objective Each group compiled a list of the potential risks to accurate financial of “ensuring reliable financial reporting”—one of the four internal reporting in their area of focus, and possible internal control mea- control objectives. The reports that each company submits serve as a sures that could be used to monitor and evaluate these risks. At the formal confirmation by company management that they approve of end of this process, the Group determined that its internal control the control systems and believe that they are effective in ensuring systems are adequate to ensure accurate financial reporting.A report accurate financial reporting. on the Group’s internal control systems was then compiled and dis- To comply with this requirement, the Group has been working for closed in June 2010. several years to establish such systems. In FY2006 we set up project

daiwa securities group annual report 2010 51 Management S ystems and c s r A c t i v i t i e s Corporate Governance Committee System

In 1999, Daiwa Securities Group Inc. became the first listed company in Japan to adopt a holding company structure. In 2004 the Group introduced a Committee System of corporate governance with three major committees that report to the Board—the “Nominating Committee,” “Audit Committee” and “Compensation Committee.” It also increased the number of outside directors, and established a clear separation between the oversight functions of the Board and the execution functions of executive officers.

Committee Members

Nominating Committee

Akira Kiyota (Chairman) Shigeharu Suzuki Tetsuro Kawakami Ryuji Yasuda Saburo Jifuku Tetsuro Kawakami Ryuji Yasuda Nobuko Matsubara Director Outside Director Outside Director 1982 Joined Daiwa Securities Co. Ltd. 1952 Joined Sumitomo Electric 19 Joined Morgan Guaranty Trust Keiichi Tadaki 200 Head of Personnel Department, Industries, Ltd. Company of New York (currently Daiwa Securities Group Inc. 19 director JPMorgan Chase & Co.) as 2008 director 1978 Managing Director Investment Research Officer Audit Committee 1980 representative Senior Managing 1979 Joined McKinsey & Company Director 199 Managing Director, Asia Pacific, 1982 president Member of the Board of Manage- Saburo Jifuku (Chairman) 199 chairman of the Board ment, A.T. Kearney, Inc. 1998 corporate Auditor, Daiwa Securities 2002 chairman of A. T. Kearney, Far East Koichi Uno Co. Ltd. Asia 1999 advisor, Sumitomo Electric Visiting Professor, Hitotsubashi Industries, Ltd. University, Graduate School of Nobuko Matsubara 2002 outside Director, Daiwa Securities International Corporate Strategy Group Inc. 2003 chairman of the Board, Keiichi Tadaki 2008 Honorary Advisor, Sumitomo J-Will Partners Co., Ltd. Electric Industries, Ltd. outside Director, Daiwa Securities Group Inc. Compensation Committee 200 professor, Hitotsubashi University, Graduate School of International Corporate Strategy Akira Kiyota (Chairman) Shigeharu Suzuki Tetsuro Kawakami Ryuji Yasuda Koichi Uno

Koichi Uno Nobuko Matsubara Keiichi Tadaki Outside Director Outside Director Outside Director

19 Joined Arthur Andersen & 19 entered Ministry of Labor 1969 public Prosecutor of the Tokyo Company Tokyo Office 198 director of International Labor District Public Prosecutors Office 19 transferred to Arthur Andersen & Division 199 chief Prosecutor of the Oita District Company London Office 199 director-General of Women’s Public Prosecutors Office 19 returned to Tokyo Office Bureau 199 public Prosecutor of the Supreme 1979 partner, Tax Division 1997 Vice Minister Public Prosecutors Office 198 representative Partner, Koichi Uno 1999 president of Japan Association for deputy Vice-Minister of Justice Tax Accounting Office Employment of Persons with 2002 Vice-Minister of Justice 2000 Founded CPA UNO OFFICE Disabilities 200 superintending Prosecutor of the Part-time lecturer, Hitotsubashi 2002 ambassador of Japan to Italy Tokyo High Public Prosecutors University, Graduate School of ambassador of Japan to Albania Office International Corporate Strategy ambassador of Japan to San Marino 200 prosecutor General 200 outside Director, Daiwa Securities ambassador of Japan to Malta 2008 Special Counsel Attorney at law of Group Inc. 200 advisor to Japan Institute of Mori Hamada & Matsumoto Workers’ Evolution Chairman, Chairman of Japanese Correctional Japan Institute of Workers’ Association Evolution 2009 outside Director, Daiwa Securities 2008 outside Director, Daiwa Securities Group Inc. Group Inc. 52 daiwa securities group annual report 2010 Compliance

The Daiwa Securities Group’s corporate principles identify “building trust” and “contributing to society” as among the most important goals of our business operations. We believe that compliance is necessary to “build trust.” The goal of the Group’s compliance activities is not merely to “comply with laws and regulations,” but to earn the trust of customers, the market, and society. Therefore, we are constantly taking steps to educate and train executives and employees to uphold external regulations, exercise self-discipline and appropriate conduct, and thereby maintain high ethical standards to fulfill our role in society.

The Daiwa Securities Group’s Approach to Compliance Daiwa Securities is taking measures, under the Group’s compli- TheD aiwa Securities Group aggressively conducts compliance train- ance program, to establish an internal control system that will enforce ing programs for its employees. These programs commence as soon strict compliance with laws and regulations, as well as with the basic as employees enter the company and continue through regularly principles of proper social behavior. These measures included the scheduled training sessions throughout their career, thus ensuring establishment of the Sales Inspection Department in order to improve that every employee is aware of, and thoroughly understands, com- the efficiency of and enhance audits of branch offices. Through such pliance issues. As the company pursues new business ventures in efforts,D aiwa Securities is bolstering its ability to fulfill its mission as areas where the regulatory structure is still incomplete, employees a securities company. are trained to approach all matters with strong self-discipline and Also, in order to ensure the efficiency and effectiveness of internal legal awareness, refer to existing legal precedents whenever possible, control systems, Daiwa Securities is focusing on improving the effi- and always adhere to accepted social norms of proper behavior. ciency of clerical work by utilizing its system infrastructure as well as In FY2009, the Group continued its focus on training related to instituting various types of training and employee education pro- insider trading from FY2008. The subject-matter of this training is grams. Previously, many sales branches have operated based on a sys- being made more concrete through the use of such materials as the tem in which administration section managers also serve concurrently list of fines collected from financial offenders published by the Finan- as internal administrators. However, in FY2010, all sales branches cial Services Agency. Insider trading is a serious concern because it were switched-over to a system in which a single employee serves can severely damage the public’s faith in capital and financial mar- exclusively as the internal control supervisor. Through these efforts, kets. As a major participant in capital and financial market activities, Daiwa Securities is further enhancing its internal control structures. the Daiwa Securities Group has a duty to make sure that it is never Daiwa Securities CM has identified legal compliance and the cre- involved in this sort of activity. In July 2009, the Group began par- ation of a strict internal control structure as among the most impor- ticipating in a real estate asset management business. The real estate tant issues for management to address. As a result, the company has investment trusts (REITs) that are managed as a part of this business, formulated a detailed compliance strategy, which it has implemented while not affected by laws regarding insider trading, have the risk of as part of its compliance program. In FY2009, Daiwa Securities CM engaging in transactions that are similar to insider trading. In took steps to strengthen its systems to ensure the protection of com- response to this risk, the Group developed trading rules for execu- pliance, including implementing measures geared toward fulfilling tives and employees that deal with REITs. its responsibility to develop systems to control conflicts of interests, TheG roup is also taking steps to eliminate any and all relations with as defined in revisions to the Financial Instruments and Exchange corporate racketeers and other antisocial groups. Daiwa Securities Law, and eliminating transactions with antisocial groups. It also con- Group Inc. has organized the “Corporate Ethics Promotion Liaison ducted training programs for all executives and employees to ensure Meeting,” which meets once each quarter, in principle, and includes that they are aware of and comply with all laws and regulations. In representatives from the departments responsible for compliance at FY2010, Daiwa Securities CM will work to maintain and strengthen each Group company. These meetings have been used as a tool to pro- its compliance systems with the aim of expanding its business in vide guidance on how to respond to such undesirable organizations. As Asia. At the same time, it will implement the rules regarding the revi- one facet of this, in FY2009, guidance was provided through the use of sions to the Financial Instruments and Exchange Law and strengthen actual case studies on response methods toward antisocial groups. its prevention systems to eliminate transactions with antisocial Further, guidance detailing the importance of introducing policies groups. Through such efforts, as well as through the enhancement of regarding the elimination of gangs and other such organizations into education programs, Daiwa Securities CM will develop an even more such mediums as company regulations and contracts was also offered. robust internal control structure going forward.

daiwa securities group annual report 2010 53 Management S ystems and c s r A c t i v i t i e s IT Strategy and Information Security

The Daiwa Securities Group aims to provide customers with high-value-added products and services quickly, precisely, and reasonably priced. To this end, it uses IT strategically. As an active participant in the financial and capital markets, the Daiwa Securities Group possesses information resources, including personal information. In order to protect these information resources from outside threats, the Group is working to maintain and improve the level of its information security.

IT Governance System Additionally, the Group aims to reduce the cost and time required The Group has established the “Group IT Strategy Committee”, to construct new systems as well as aims to provide steady system chaired by the CIO, as a subcommittee of the Executive Committee. support services in a cost-efficient manner. To this end, the Group is This committee deliberates and makes decisions on such issues as continually advancing the standardization of its systems. budgets for IT investment and the allocation of IT functions. Addi- tionally, the “Group IT Management Council” has been established IT Strategies under “Passion for the Best” 2011 as a preliminary discussion forum for this committee. The council The Daiwa Securities Group’s medium-term management plan, discusses IT-related matters of importance at the executive level, “Passion for the Best” 2011, outlines the IT strategy to “achieve the IT such as the construction of Group-wide infrastructure systems and function and framework with the competitive advantage built by the the Group’s information security measures. Group’s strategies and cost efficiency.”A cting in accordance with this The council also periodically reports on issues regarding the man- strategy, the Group is implementing measures geared toward optimiz- agement of system risk and information security risk throughout the ing the scale and allocation of its IT functions as well as improving Group to the “Internal Control Committee,” which is a division of productivity in system development and management. the Executive Committee. Additionally, the Group is focusing on strengthening its global IT development platform and IT systems in order to better support Strategic IT Initiatives global businesses, centered on Asia. Amidst the rapidly increasing diversity and complexity of securities- related operations, IT is indispensable in providing customers with high-value-added products and services quickly, precisely, and reasonably priced. The Group uses IT strategically to achieve its main goal of improving both the maintenance of its competitive edge and the effectiveness of control of the quality and costs of system services. In regard to IT investment planning, the Group rigorously selects the investment necessary for each individual operating division. At the same time, the Group gives high priority to the allocation of IT resources in key focus areas, such as enriching products and services for online trade in retail operations as well as improving and expanding the execution infrastructure in wholesale operations.

54 daiwa securities group annual report 2010 IT Strategies Under “Passion for the Best” 2011 Medium-term Management Plan

Develop cost-effective IT function and framework with a competitive advantage, in line with the Group strategies

E Build an efficient and flexible systems development and management framework Optimize the Group’s IT organization while reducing total cost and scale Review the allocation of IT functions among Group companies and develop an IT support system that can respond to changing conditions

E Reinforce global development Cooperate with overseas IT developers and strengthen the IT infrastructure in Asia and emerging countries

E Pursue cost efficiency and provide stable systems services Reduce systems-related costs by unifying infrastructure and improving productivity in system development and management Review the service content and level of each system to achieve higher security and a lower total cost

E Improve IT-related knowledge within the Group

Measures for Maintaining Information Security Efforts to Enhance the Level of Information Security In order to fulfill its social responsibility as an active participant in The Group is promoting the use of an Information Security Manage- the financial and capital markets, as well as gain the trust of customers, ment System (ISMS), and we are constantly examining new ways to the Daiwa Securities Group has adopted a full spectrum of informa- improve information security through a cyclical approach: “Plan / Do / tion security policies at companies throughout the Group to ensure Check / Act.” that the important personal information received from customers Additionally, in recognition of the importance of human factors and all other information resources are managed in a secure and in effective information security systems, the Group has introduced appropriate manner. training programs to educate all executives and employees in the Among the organizational measures that we have adopted is the basics of information security. A range of training programs has “Information Security Group Minimum Standard,” which dictates been designed with content tailored to the job functions of execu- the basic rules that all companies in the Group must adopt for han- tives, section managers, those in charge of security-related opera- dling information. In addition to introducing these information tions, and other employees. The programs are offered periodically as security rules at each company, we have appointed a “Chief Informa- group training sessions, as well as through e-learning. tion Security Officer” at eachG roup company to oversee information management activities. A variety of technical and structural measures have also been introduced to enhance security and ensure that Group information resources are managed appropriately, such as office automation through the use of thin clients and high-security access controls at the data center. The online trading systems of Daiwa Securities employ highly advanced encryption technology for data transmission and for user ID verification, thereby ensuring that clients are able to use the system safely and securely.

daiwa securities group annual report 2010 55 Management S ystems and c s r A c t i v i t i e s Disclosure

The Daiwa Securities Group strives to earn the trust of stakeholders by meeting the “very highest standards of disclosure among Japanese companies.” We work proactively to provide fair, prompt, and appropriate information to customers, shareholders, investors, the local communities, executives, and employees in order to ensure that all of these stakeholders receive a clear understanding and proper evaluation of the Group’s business activities.

Disclosure System convenes once a month, to discuss the issues that affect disclosure The Daiwa Securities Group has formulated the “Disclosure Policy,” activities for the Daiwa Securities Group as a whole. which outlines the Group’s basic approach to information disclosure and strives to provide information that is fair, prompt, and appropriate. Enhancing Investor Relations Activities In addition, Daiwa Securities Group Inc. has established the TheD aiwa Securities Group supplies shareholders and investors with “Disclosure Committee”—a subcommittee of the Executive Com- the data and explanations of its earnings results, an outline of its mittee—as stipulated in the Group’s “Disclosure Regulations,” which business strategies and descriptions of the progress made toward its were established in order to ensure concrete implementation of the strategic goals in a forthcoming manner. These disclosure activities spirit of the Disclosure Policy. The committee is responsible for mak- also solicit feedback, providing management with information on ing final decisions regarding the disclosure of information. Major market reactions and opinions to help them further improve man- Group companies have also established their own regulations or agement transparency and efficiency, and thereby boost corporate “Management-related Information,” which govern the appropriate value in the eyes of investors. collection of information and presentation of reports to Daiwa Secu- The Group strives to disclose information that is fair, prompt, and rities Group Inc. appropriate, and takes steps to eliminate any disparity between the The responsibilities for disclosure are clearly allocated, based on the information available to domestic stakeholders and that provided to intended recipient of the information. The Investor Relations Depart- overseas stakeholders. Information on quarterly financial results is ment handles disclosure to shareholders, investors and analysts. The posted on the Investor Relations (IR) webpage of the Group’s website Corporate Communications Department is responsible for commu- immediately after the official announcement. The Investor Relations nications with the mass media, and the CSR Promotion Department Department conducts a conference call with domestic analysts and provides information to local communities. Information is released institutional investors on the evening of the same day, which is also through a variety of media, including via the Internet and in print. In streamed on the website in real time. A conference call with overseas addition, representatives from disclosure-related divisions of all investors is conducted later that same evening. The Group’s CEO Group companies take part in the Group “PR/IR Meeting,” which holds Group strategy meetings for securities analysts and institutional

Flowchart of the Daiwa Securities Group’s Disclosure Activities

Information Disclosure

Daiwa Securities Reporting*1 Disclosure Committee Group Inc. Executive Committee Determines what information will be disclosed and the disclosure method

Disclosure Committee Secretariat

Corporate Planning Finance Department Department

Subsidiaries*2 Flow for management-related information Departments responsible for processing information (excluding financial information) (Corporate Planning Department, etc.) Flow for financial information

*1 Reporting on all items that the committee Department with jurisdiction over the information, chairman determines to be “important” or the executive officer responsible *2 Includes all companies in the group, whether direct subsidiaries of the holding company, or subsidiaries of other subsidiaries

56 daiwa securities group annual report 2010 investors in Japan twice a year. In addition, the top management trav- a downtown hotel in Tokyo. For those shareholders who are unable to els overseas to meet with institutional investors. In FY2009, top man- attend the meeting in Tokyo, the Group broadcasts this event via live agement held conferences, as it had in previous years, with investors satellite transmission to venues in Osaka and Nagoya. To encourage in Europe, the US, Hong Kong and Singapore. investors to exercise their voting rights, the Group allows shareholders The Group also renewed its website in order to make it easier to to vote via the Internet or by mobile phone. understand for individual investors and overseas stakeholders. The In FY2006, we joined the “Electronic Voting Platform for Institu- new design layout allows even first-time users to easily find the page tional and Foreign Investors,” which allows institutional investors that they are looking for. Going forward, the Group will update the both in Japan and overseas to vote quickly and directly on proposals information available on all pages one after another to ensure the to the General Shareholders’ Meeting via the Internet. website is even useful. Additionally, a “Fact Sheet” is published in TheG roup will continue to develop an IR structure that is tailored both Japanese and English, as a tool to communicate with investors to the needs of each type of investor, in a concerted effort to com- and offer basic information on the Group and its business activities. municate frankly and proactively with all of our stakeholders. In this In order to encourage more shareholders to attend the General way, we hope to serve as an example to other listed companies of how Shareholders’ Meeting, which gives Group representatives an oppor- to communicate with investors, and thereby help to promote a more tunity to interact directly with shareholders, since 2006 we have been vibrant securities market. holding the meeting on a Saturday, in a spacious conference room at

Daiwa Securities Group Inc. website top page (URL: http://www.daiwa-grp.jp/english/)

Investor Relations page (URL: http://www.daiwa-grp.jp/english/ir/)

Daiwa Securities Group Disclosure Policy

E The Daiwa Securities Group will disclose important financial, social and environmental information about the Group (“Management- related Information”) in a prompt, fair and appropriate manner, so that our stakeholders, (including shareholders, investors and the communities we operate in) may understand and maintain realistic expectations of the Daiwa Securities Group.

E The Group will comply with the Financial Instruments and Exchange Law and other laws and ordinances related to securities transactions and the various rules of the financial instruments exchanges on which our stock is listed.

E The Group will strive to disclose information fairly, in terms of both content and timing. E The Group will utilize various communication channels including presentations, telephone conferences, the Internet and printed materials to disclose information in a manner that is easy for investors to comprehend.

E The Group will keep in mind its responsibility to set an example for other listed corporations, in terms of disclosure, and will strive to promote healthy markets.

E To ensure that these policies are implemented properly, the Group has established “Disclosure Regulations” which include guidelines for disclosing management-related information and standards for establishing a “Disclosure Committee.”

daiwa securities group annual report 2010 57 Management S ystems and c s r A c t i v i t i e s Risk Management

While the Daiwa Securities Group pursues profitability and growth, it also recognizes the importance of accurately identifying, evaluating, and effectively controlling the various risks associated with its business operations. Our objective is to steadily improve corporate value by maintaining a sound financial base and profit structure, by properly balancing risks and returns, and by implementing effective risk control and management.

Basic Risk Management Policy to properly identify, evaluate, and manage these risks in order to The Daiwa Securities Group has established “basic risk management maintain healthy financial and earnings structures.D aiwa Securities regulations” governing all activities by Group companies to manage risk Group Inc. engages in risk management to clearly identify risks based in order to ensure that they conform to the following basic policies: on the respective Group company’s business characteristics and risk 1. Management shall demonstrate an active concern for managing risk. profile. The types of risks that have been deemed important to manage 2. An appropriate and comprehensive risk management structure include market risk, credit risk, liquidity risk, operational risk, shall be established to address the specific characteristics of systems-related risk, information security risk, legal and compliance risk faced by Group companies. risk, and reputation risk. 3. All risk management processes shall be clearly identified. Risk Management System Types of Risks The Board of Directors of the Company has approved “basic risk The Daiwa Securities Group faces various risks in the course of its management regulations.” These regulations define basic policies business activities. The Group therefore believes that it is important related to risk management, the types of risk that are necessary to be

Risk Management System

Holding Company (Daiwa Securities Group Inc.)

Board of Directors

Audit Committee (Auditing body)

Executive Committee (Decision-making and reporting on major policies and issues)

Internal Control Committee Disclosure Committee (Internal control, risk management, internal audits) (Timely and appropriate disclosure)

Risk management implementation structure

Major risks Department in charge Executive officer in charge

Market/credit/liquidity risk Group Risk Management Department CRO

Operational risk Departments in charge Executive officers

Systems & Information security risk Information Technology Department CIO Legal Department, Finance Department, Legal and compliance risk Executive officer for legal affairs General Affairs Department Corporate Communications Department, Reputation risk Investor Relations Department, Executive officers General Affairs Department

Periodic reporting Establishment of basic policy/monitoring/ recommendations Group companies

Daiwa Securities Capital Markets Daiwa Securities Others

Overseas subsidiaries

58 daiwa securities group annual report 2010 managed, and the executive and department in charge of risk manage- Major Risks and Methods of Management ment. Based on these policies, risk management systems are being Market Risk unified throughout the Group. Further, principal Group companies Market risk refers to the risk of incurring losses due to market fluc- have established risk management departments and assigned execu- tuations, which affect the value of stock prices, interest rates, foreign tives in charge of risk management, which has allowed individual exchange rates, and commodity prices. companies to develop risk management systems based on the charac- Most of the Group’s trading positions are exposed to market risk. teristics and scale of the risks faced by that company. Daiwa Securities Therefore, it is of paramount importance to quantify the impact that Group Inc. maintains close contact with the risk management depart- market fluctuations have on the value of financial assets and liabili- ments within each principal Group company, and has developed sys- ties in order to gain a more objective understanding. tems through which these issues can be discussed, by reporting Based on this view, the Group employs Value at Risk (VaR), with a instances of risk and issues related to the risk management systems to confidence level of 99% and a holding period of one day, as an index the Internal Control Committee. to help understand the potential impact on the Group as a whole. In In April 2010, Daiwa Securities Group Inc. established the “Group addition, stress testing and scenario analysis are used to help the Risk Management Department” to manage risks comprehensively Group anticipate and control the total exposure to risk that could and directly for the entire Group, and assigned the Chief Risk Officer emerge in the case of unprecedented market fluctuations. Further- (CRO) to head this organization. more, upper limits are set for each individual risk factor, based on the characteristics of the risk, to ensure that the Group is prepared for any change in its risk profile.

Value at Risk Range and Assumption of VaR • Confidence level: 99% Holding period: 1 day • Adjusted for price correlation between products

Daiwa Securities Group Inc. (Consolidated) (¥ billion)

6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10

VaR (Month-end) 3.16 2.65 1.83 3.89 1.77 2.81 2.99 4.33

High 4.56 2.75 9.95 7.99 4.08 3.71 5.13 7.07

Quarterly Low 2.09 1.30 1.41 1.39 1.77 1.62 2.53 2.63

Average 2.95 2.10 3.16 3.18 2.89 2.44 3.64 5.26

By Risk Factor (Month-end)

Equity 1.44 0.59 0.67 0.89 0.89 0.95 0.78 0.57

Interest 3.73 2.87 1.29 2.75 1.24 0.86 2.36 4.27

Currency 1.03 1.39 0.75 2.88 1.28 2.57 1.71 1.01

Commodities 0.02 0.00 0.01 0.24 0.01 0.01 0.00 0.00

daiwa securities group annual report 2010 59 Management S ystems and c s r A c t i v i t i e s

Credit Risk The Group’s methods of fund procurement include unsecured Credit risk refers to the risk of any losses caused when a client, to means, such as the issuance of straight corporate bonds, medium-term which the Group extended credit, suffers a deterioration in financial notes, loans from other financial institutions, commercial paper, and conditions, a valuation loss on assets (including off-balance-sheet call money. They also include such secured means as gensaki trading assets), or for some other reason is unable to repay its debt. (repurchase agreements) and repo operations. Through the optimal In regard to transactions that involve exposure to credit risk, combination of these methods, the Daiwa Securities Group is engaging before the transaction is made the Company assigns the transaction in the efficient and stable fund procurement. partner a credit limit based on their credit rating. Subsequently, the In order to ensure financial stability and prevent fluctuations in the Company carefully monitors estimations of the nominal value of market from affecting the continuation of our business activities, the principal and the amount of credit used. Company is constantly striving to secure the stability of fund procure- In the wholesale business, where the exposure to credit risk is comment. From the latter half of FY2008, the Company has been accumu- paratively high, the Group assigns credit limits to each transaction lating liquidity through such means as fund procurement through the partner—on the basis of a credit evaluation model that incorporates market as well as loans from financial institutions, in preparation for such factors as the credit period, availability and appropriateness of unforeseen events such as those caused by financial crises or credit collateral, and validity of associated contracts—to determine the prob- crunches. Additionally, as it can be anticipated that such crises may ability of repayment. In addition, credit-VaR calculations are used to make it difficult to reacquire capital from new and existing sources, the periodical confirm the effects of large offerings of credit. repayment periods of procured capital are staggered. Further, the Group has established policies to manage liquidity. In Market Risks And Credit Risks Unrelated To Trading order to ensure the ability to procure short-term unsecured capital, Positions Daiwa Securities Group Inc. maintains a liquidity portfolio consist- The Group also owns private equity and other investments related to ing of cash, deposits, government bonds, and other highly liquid principal investment businesses and venture capital, as well as invest- instruments as well as a supplementary-liquidity portfolio consisting ment securities unrelated to its trading positions that are held for a of relatively liquid instruments. long-term perspective for the purpose of maintaining business rela- At the end of FY2009, the value of the liquidity portfolio totaled tionships. While market risk and credit risk may arise in relation to ¥810.9 billion. The total of the liquidity portfolio and the supplemen- these assets, each business is faced by risks with particular character- tary-liquidity portfolio was ¥2,355.4 billion, which is equivalent to istics. Accordingly, the Group adopts indicators that are appropriate 190.1% of total short-term unsecured capital at the end of FY2009. to the particular type of risk (such as the balance of assets held, clas- sification of holdings by credit rating, or VaR), and regularly moni- Operational Risk tors risk and credit conditions in order to manage the credit limits Operational risk is the risk of incurring losses due to inappropriate appropriately. or malfunctioning internal processes, personnel, or computer systems, or due to adverse external events. Liquidity Risk As the Group’s business becomes more sophisticated, diversified, The Daiwa Securities Group, while employing a variety of financial and systemized, the accompanying risks become more varied, and as assets and liabilities, conducts its business with a focus on securities- a result the need to manage such operational risk grows each year. related operations as its core business. Accordingly, it procures capital Specialized sections have been set up in each Group company to based on the policy of efficiently ensuring ample liquidity necessary address operational risk, and conferences are also held to consider for the continuation of its business. any necessary issues. Due to the diversifying nature of its business, the Group sets rigid rules concerning authority, automates office work processes to reduce human error, prepares business manuals, and takes other necessary measures. Each Group company strives to reduce operational risk according to the nature of its own business.

60 daiwa securities group annual report 2010 Systems-related Risk, Information Security Risk Reputation Risk Systems-related risk and information security risk refer to the poten- Reputation risk refers to the possibility of the Group sustaining tial for incurring losses due to a computer breakdown or malfunc- unforeseen losses due to a deterioration of its reputation, caused by tion, or other systems-related problem, or the inappropriate use of a the spread of rumors or erroneous economic information. There are computer. It also covers the risk that the security of information no uniform procedures for managing reputation risk because it can resources (confidentiality, completeness, availability) is not properly emanate from a variety of sources. protected against threats from inside or outside of the Company. The Group has established various regulations under its Disclosure The Group has developed regulations and manuals that define the Policy, with particular emphasis on the management and provision basic procedures for reducing and preventing the occurrence of such of information. It has also set up the Disclosure Committee within risks as well as the management of information resources. Internal Daiwa Securities Group Inc. audits are used as an opportunity to periodically confirm whether or Each Group company is charged with the task of reporting infor- not these regulations are being adhered to. At the same time, the mation on reputation risk to the Disclosure Committee. Information Group is working to maintain and strengthen the precautionary is obtained and centrally managed at Daiwa Securities Group Inc., measures that enable it to quickly uncover problems related to com- which disseminates it in a prompt and accurate manner according to puter systems and properly repair them. Further, steps are being the decisions of the Disclosure Committee. taken to improve the understanding and awareness of information The Group works hard to keep abreast of problems and occur- security held by executives and employees. rences that may affect its reputation so that if and when such problems occur, their impact on the Group can be minimized. It also acts Legal and Compliance Risk to ensure that erroneous and inaccurate information is properly cor- Legal and compliance risk includes regulatory risk, which is the risk rected, and responds appropriately to libel and other issues. The regarding compliance with the law, and litigation risk, and refers to Group has public relations and investor relations systems in place to the potential for incurring any of a variety of losses due to noncom- prevent and minimize risks to its reputation. pliance with laws and other regulations, lawsuits, invalid contracts with third parties, or violations of corporate ethics rules. Such potential losses may include loss of reputation as a service provider or loss of business. The Group is managed through the principles of Group management with securities-related operations as its core business. It must abide by the Financial Instruments and Exchange Law, as well as observe the associated laws and regulations when executing securities transactions and comply with various regulations in general operations outside of the securities business. Even in nonoperational matters, high standards of discipline are expected of financial instruments dealers and brokers and their personnel with regard to market rules and regulations, such as those related to insider trading. To ensure that these regulations are observed, the Group has set up compliance sections at each Group company and established committees to discuss and resolve compliance issues and matters related to corporate ethics. Securities transactions and other third-party agreements often require high levels of specialization to determine the legality of contracts and suitability of processes. In response to such cases, the Group has consulting agreements with law firms, including overseas firms, to obtain legal advice.

daiwa securities group annual report 2010 61 Management S ystems and c s r A c t i v i t i e s Financial Strategy

In order to maintain a healthy balance between financial stability and effectiveness, the Daiwa Securities Group concentrates on finding ways to use financial resources to enhance corporate value. The Group seeks to maintain an appropriate level of liquidity through effective yet flexible methods of procuring and utilizing capital that reflect market conditions. Furthermore, the Group strives to maintain a healthy balance between assets and liabilities to ensure that its financial condition remains constantly stable.

Effective Methods of Procuring Capital Financial Strategy Under the Medium-term Manage- TheD aiwa Securities Group uses a diverse assortment of methods to ment Plan, “Passion for the Best” 2011 raise capital, including through straight corporate bonds, medium- Under its new medium-term management plan, the Daiwa Securities term notes, loans from other financial institutions, commercial Group has adopted a financial strategy that aims to strengthen the paper, call money, gensaki trading (repurchase agreements), and repo Group’s financial base and allow it to manage finances more flexibly. operations. The Group adopts an appropriate mix of these methods To this end, the following three measures will be adopted. in order to procure capital effectively. When utilizing medium- and 1. Improve Financial Health and Stability by Expanding the Finan- long-term instruments, such as straight corporate bonds and medium- cial Base term notes, the Group maintains a constant awareness of trends in In order to provide an ample financial base to support operations, the the financial markets, thereby procuring capital at the most advanta- Group intends to revise its capital allocation strategy. Businesses that geous time possible. require large balance-sheet commitments will be examined carefully and the Group’s holdings of investment assets will be managed with Financial Stability greater care. The Group also plans to rein in capital investment and The Group exercises great care to ensure that it always has access to a trim expenses, in addition to subjecting future investments to more stable supply of capital, and thereby avoids any situation that might stringent checks to ensure that they contribute to greater profitabil- jeopardize the Group’s continued viability in the case of extreme ity. In particular, the Group will establish a clear ranking of priorities fluctuations in economic and financial conditions. In particular, the for capital investment with a view to managing the overall capital Group constantly monitors whether there are sufficient capital on spending budget more carefully, and make cost a primary consider- hand and its funding capabilities to maintain unsecured current lia- ation when deciding whether to obtain equipment or capabilities bilities. Any time there are signs that the financial markets are enter- in-house or to outsource them. ing a period of volatility, the Group responds promptly to increase 2. Enhance Capital Procurement Ability in order to Respond liquidity and prepare itself for any unexpected eventualities. Flexibly to Growth Opportunities The Group will take steps to enhance its ability to procure capital, Group-wide Capital Management giving it greater flexibility to obtain capital and operating funds, and to Daiwa Securities Group Inc. is responsible for monitoring and man- fund investment that could lead to growth opportunities. In addition aging liquidity conditions for the Group as a whole. In congruence to adopting a broader range of methods for capital procurement, and with the basic policy of maintaining the financial stability of the seeking funds from a greater variety of sources, the Group will revise Daiwa Securities Group, the Group’s domestic and overseas securi- its management structure so that it can employ existing methods of ties subsidiaries (including Daiwa Securities and Daiwa Securities obtaining funds more flexibly. The Group will strive to maintain an CM) as well as Daiwa Corporate Investment conduct fund procure- appropriate balance between dividend payments and retained earn- ment based on the characteristics of their business, and work to ings so that it will always have sufficient capital to pursue growth maintain the liquidity necessary to continue their business activities. opportunities. Daiwa Securities Group Inc. also conducts basic fund procurement 3. Strengthen the Management Structure and Improve Group-wide activities for other subsidiaries, and manages Group-wide finances Coordination comprehensively with the goal of allocating capital effectively. The Group intends to establish more-effective accounting systems and other forms of financial infrastructure, in order to ensure that it Contingency Plan can swiftly obtain precise consolidated financial information for the TheG roup has established a contingency plan as part of dealing with Group as a whole. In addition, it will promote greater coordination liquidity risk. The details of this contingency plan are monitored and among members of the Group and a unified management structure, reviewed on a regular basis, and both the fund procurement plan and particularly in regard to issues such as capital procurement and risk the contingency plan are adjusted, when necessary, to account for any management. In this way, the Group intends to make its financial new risk scenario that might become apparent. management activities more flexible and more effective.

62 daiwa securities group annual report 2010 Human Resource Management

The Daiwa Securities Group derives much of its competitive strength from its personnel. To maximize competitiveness, the Group fosters a working environment in which all employees are motivated to enhance their abilities and realize their full potential. We actively encourage employees to upgrade their skills, and we are striving to establish a personnel management system that can evaluate employee performance more accurately.

Group Personnel Policy Skill Enhancement Opportunities and Career Development TheD aiwa Securities Group is “keenly aware of the importance of our Options for Employees employees,” who are the wellspring of the Group’s competitiveness. The Group continues to upgrade its personnel support systems, which Our stated policy is to “emphasize the creativity of each employee, encourage employees to enhance their skills and obtain qualifica- foster a free and vigorous corporate culture filled with the spirit of tions related to financial services, such as toward becoming a securi- challenge, and accurately evaluate the performance and contributions ties analyst or financial planner. We also have implemented various of employees.” One of the best ways for a company to improve cus- programs that train employees in important skills, including helping tomer satisfaction, which in turn will raise shareholder value, is to seek them to acquire practical business skills such as giving presentations out optimal systems and methods for motivating employees. or coaching subordinates, as well as training for the next generation of managers. Additionally, we are developing a working environment Advanced Evaluation System and Performance-based Remuneration in which employees can learn English through such means as e- The Group adheres strictly to both results- and performance- learning programs. Employees must earn a specified number of oriented standards of evaluation in order to ensure that its personnel “qualification points” in order to receive promotion to a given job system is fair and objective. In response to changes in the Group’s level. Points are awarded when the employee meets certain certifica- personnel distribution and social environment, the Group reviewed tion-based criteria, and the number of points awarded increases rela- and revised all aspects of its personnel system in April 2010. The goal tive to the difficulty of earning the particular qualification. This of this undertaking was to develop a working environment in which system provides employees with greater incentives to enhance their all employees can remain highly motivated in their work, from enter- abilities. ing the Company until retiring. In addition, we have adopted an “intra-Group job posting system,” In order to ensure the fair and objective treatment of employees, the which allows employees to embrace new challenges by moving to a Group uses both a “two-way evaluation system” in which superiors and department of their choice within the Group. Since its introduction subordinates evaluate one another as well as a “multidirectional evalu- in 2000, the system has attracted 857 applicants, 141 of whom have ation system” in which employees are evaluated by other closely related successfully qualified for transfers. divisions and Group companies, based on objective criteria. Daiwa Securities has established the “President’s Awards,” which are awarded twice a year in an effort to further motivate employees. A similar award program has been introduced at Daiwa Securities CM. The Group has also adopted an employee remuneration system that is based on job category as well as performance appraisals using a detailed, job-specific evaluation process. At the deputy general manager level, this could result in up to a 16-fold difference in bonuses and up to a three-fold difference in salary, based on results from FY2009. Performance-based annual remuneration systems were introduced for analysts and fund managers whose annual salaries reflect analyst rankings or fund performance.

daiwa securities group annual report 2010 63 Management S ystems and c s r A c t i v i t i e s

Promotion of a Balance Between Work and Personal Life recognizes the importance of this relationship in attracting and keep- If employees are able to maintain a harmonious balance between work ing top-quality personnel, as well as in ensuring that it can achieve and personal life, enjoying a healthy and rewarding lifestyle, their sustainable development as an enterprise. Consequently, the Group motivation and loyalty to the company will increase, making them has continuously promoted the concept of a “Work-Life Balance.” valuable assets to any organization. The Daiwa Securities Group

Promotion Daiwa Securities Group Inc. has established the “Work-Life Balance Promotion Committee,” which is supervised by the Group CEO, System who has assumed the post of “Chief Work-Life Balance Officer” (CWO). In order to embody these policies, the “Work-Life Balance Promotion Section” has also been established within the Personnel Department of Daiwa Securities Group Inc.

Example E Encouraging employees to leave the office by 7 p.m. and take paid annual leave Measures Beginning in 2007, Daiwa Securities Group Inc. and Daiwa Securities have been promoting a “leave the office by 7 p.m.” policy, which was adopted by Daiwa Securities CM in 2008. In addition, these three companies in 2008 adopted a policy that encourages employees to take their paid annual leave. E Promoting family visits to the workplace Since 2008, the Group has organized an open day event that gives family members an opportunity to visit the office. This provides the Group with an opportunity to express thanks for the support families provide to employees on a daily basis, while helping them to better understand the work that their parents/spouses do for the Daiwa Securities Group. In this way, the Group hopes to promote an even better balance between work and personal life. In 2009, approximately 4,200 family members took part in this event. E Conducing work-life balance seminars Starting in November 2008, the Group has begun conducting internal company seminars to help promote a clearer understanding of what “work-life balance” means, and what the Daiwa Securities Group is doing to promote a better balance between work and personal life. To date, 30 such seminars have been conducted and approximately 2,600 employees have taken part. E Enriching support for the balancing of work and child care or nursing care We are working to enrich and promote our systems to support employees who are working while also undertaking child care or nursing care. At the same time, we are developing a working environment that makes these systems easier to use. In FY2009, we established a support desk related to child care and nursing care as well as enhanced systems to support employees returning to work. In April 2010, we introduced a system in which regular employees are able to work shorter hours and improved our paid leave system for employees with young children that have not yet completed the third grade of elementary school.

Human Resource Initiatives Under the Medium-term Offering Greater Job Satisfaction Management Plan TheG roup aims to establish itself as one of “Japan’s top corporations Under the Daiwa Securities Group’s medium-term management in terms of earning the trust of all stakeholders.” Since that naturally plan, one of the main themes of our human resources strategy is to includes employees, the human resource policies adopted as part of “encourage each employee to become a true professional in their our medium-term management plan include efforts to achieve and work activities.” This strategy includes specific measures such as the maintain high employee motivation. We are taking a variety of steps following: to make sure that all employees who work for the Daiwa Securities 1. Assignment and allocation of personnel to strategic, high prior- Group (1) feel a strong sense of “ loyalty” to the Group, (2) under- ity areas stand and take “pride” in their roles and responsibilities in the work- 2. Measures to train true financial professionals place, and (3) develop “harmony and cooperation” with the company 3. E fforts to promote a better balance between work and personal life they work for, as well as with their fellow employees.

64 daiwa securities group annual report 2010 Mental Health Care Support Awards in FY2009 Daiwa Securities Group Inc. has established the “Mental Health Sup- Host Title port Department,” which includes on-site clinical psychotherapists FY2009 “Commendations for Enter- stationed at the company headquarters. This department provides prises Promoting Equal Employment / The Ministry of Health, Work and Family Harmonization” confidential consultation services to employees who are experiencing Labour and Welfare Corporation Awards for the Promotion of anxiety, insecurity or stress, in an effort to support the mental health Gender Equality “Excellence Award from the Minister of Health, Labour and Welfare” of all Group personnel. The “Council for Promotion of Excellent-Award (Organizational Work-Life Balance” Activity Section) at the 3rd “Work- (Japan Productivity Center) Life-Balance Award in 2009” Efforts to Foster a Sense of Company Unity Nikkei Inc. The “Nikkei Child-Raising Support Award 2009” The Group understands that employees need to maintain a harmoni- Work-Life Balance Prize at the 3rd TOYO KEIZAI Inc. ous balance between their work and personal life, and that leisure “Diversity Management Awards” activities can be invaluable as a way to deepen friendships and a sense of solidarity among Group employees. Therefore, in FY2007, the Group introduced both the “Support System for Club Activities” and “Diamond Weekly” Magazine (Jan 23, 2010 Issue) the “Support System for Internal Company Events.” To date, employ- Popularity Ranking of Companies Where University ees have established 21 separate clubs under the “Support System for Students Would Like to Work (Top-Tier Among Banks Club Activities.” and Securities Companies)

Liberal Arts Majors-Male

Support and Employment for Veteran Personnel Overall rank Company

The Group has always sought ways to leverage the skills and capabili- 2 The Bank of Tokyo-Mitsubishi UFJ ties of older employees who have the desire to continue working, by 4 Sumitomo Mitsui Banking Corporation rehiring them after the official date of their retirement.I n response to 8 Daiwa Securities Group the government’s “Revised Law for the Stabilization of Employment 9 Nomura Securities of the Aged,” we introduced the “Daiwa Master System,” which will 10 Mitsubishi UFJ Trust and Banking Corporation allow the company to benefit even further from the contributions of veteran employees, in the future. Liberal Arts Majors-Female Overall rank Company

Support for Working Mothers and Other Support Systems for 2 The Bank of Tokyo-Mitsubishi UFJ Women 4 Sumitomo Mitsui Banking Corporation For many years, the Group has taken an active role in supporting 15 Mitsubishi UFJ Trust and Banking Corporation working women. The Group continues to actively recruit female 18 Daiwa Securities Group employees and encourage their contributions. As a result, not only is 21 Mizuho Financial Group the number of women rising year on year, but the Group is actively promoting many of them into managerial positions. In FY2009, four female members have been newly appointed as executive officers across the whole Group.

Mark denoting official endorsement by the Ministry of Health, Labour and Welfare of a company’s measures to support employees in caring for their children

daiwa securities group annual report 2010 65 Management S ystems and c s r A c t i v i t i e s CSR Initiatives

We believe that the Daiwa Securities Group has a corporate social responsibility (CSR) to contribute to “society” through its core businesses. It is important that each and every employee is always aware of social issues in his or her daily work. We actively promote CSR awareness among all employees and communicate with various stakeholders in the society, which will lead to enhance corporate value of the Group.

Important CSR Challenges for the Daiwa Securities Group Specifically, by offering investors Impact Investment vehicles—for TheD aiwa Securities Group aims to realize a higher level of effective- which the social objectives are clear to investors—such as Vaccine Bonds ness in its CSR activities in order to build a sustainable society. For and Microfinance Bonds, we are contributing to creating flows of capital this reason, we have established the following two important CSR that lead to solutions to social issues. challenges based on feedback received from stakeholders. 1. Leverage financial capabilities to contribute to a sustainable society 2. Develop sound financial and capital markets for the next generation Impact Investment Bonds Total Issue Amount by Fiscal Year 1. Leverage financial capabilities to contribute to a (¥ billion) sustainable society 101.7 100 Currently, the world we live in is facing a host of social issues that threaten its sustainability. These include environmental challenges such 65.2 as climate change and the loss of biodiversity, as well as issues regarding 50 43.5

the widening gap between rich and poor within the global economy. We 21.3 believe that the financial sector is uniquely positioned to offer solutions 0 to these issues. 2007 2008 2009 2010 (Fiscal year) (As of end of June)

Sales of Impact Investment Bonds Daiwa Securities’ Market Share of

(¥ billion) Impact Investment Bonds Name Issue Date Issue Amount (Approx.) March 19, 2008 ¥21.3

Vaccine Bonds February 20, 2009 40.8

March 24, 2010 30.9 World CO2L (“Cool”) Bonds June 26, 2008 2.7 71% November 20, 2009 24.6 Microfinance Bonds June 15, 2010 8.7

Green World Bank Bonds February 3, 2010 9.7 Water Bonds April 16, 2010 60.4 May 21, 2010 32.6 Climate Awareness Bonds Source: Daiwa Securities * Bonds sold for retail investors (as of June 30, 2010)

Daiwa Securities Group Stakeholders

Securities markets Shareholders Investors Issuers Customers

The Group cooperates with all those The Group provides shareholders with The Group is constantly developing prod- The Group supports the efforts of The Group strives to maintain equita- who operate or participate in the clear information in order to earn ucts and services that can address the corporations and public organizations ble relationships with all business securities markets, to promote the trust and loyalty, and makes a con- needs of both individual and institutional to procure capital by issuing stocks partners, while working to promote a development of healthy and reliable stant effort to meet their expecta- investors, as well as potential investors and bonds. sustainable society. markets. tions by creating and enhancing who are considering future investments, value. in an effort to steadily enhance customer satisfaction.

66 daiwa securities group annual report 2010 2. Develop sound financial and capital markets for the volunteer activities associated with social welfare and medical treatment. next generation We also cooperate with NPOs to support other types of benevolent Financial and capital markets are a part of the social infrastructure that activities and disaster relief operations. has become indispensable in recent years. In order to build a sound and sustainable society, we consider the ongoing development of fair and trans- CSR Activities Outside of the Company parent markets to be the core social mission of financial institutions. It is necessary for corporations, as well as countries and international One way in which we work to accomplish this mission is through pro- organizations, to play a vitally important role in the effort to build a sus- viding high-quality financial information. We run Daiwa Securities tainable society. Information TV*, Japan’s only channel dedicated to securities and eco- In January 2010, the Group became Japan’s first securities company to nomic information. With the goal of providing high-quality information join the “United Nations Global Compact”*1. We have also participated in on financial and capital markets to a wide audience, it broadcasts not only the “Carbon Disclosure Project (CDP)”*2 since March 2004, the “United analyst research, but also a wide variety of business and economic news Nations Environment Programme Finance Initiative (UNEP FI)”*3 since pertinent to daily life. November 2004, and the “Principles for Responsible Investment (PRI)”*4 Further, we recognize that improving the level of financial literacy, espe- since it began in 2006. Through such initiatives, we are continuing to cially among young people, is crucial in order to develop sound financial engage in CSR activities based on international trends. markets. Toward this end, we continue to participate in corporate training *1 United Nations Global Compact: Launched in July 2000, the United Nations Global Compact is a policy-making platform for programs, build academic–industrial alliances, and work in cooperation companies committed to sustainability and responsible business with “Junior Achievement (JA),” the world’s largest non-profit organiza- practices. Members are required to incorporate certain principles in the fields of human rights, labour, the environment, and tion (NPO) promoting economic educational activities for youth. anti-corruption in their business activities. * Daiwa Securities Information TV offers economic and financial programs cen- *2 CDP: An alliance of institutional investors concerned about climate change, this tered on market news. It airs on Sky PerfecTV channel 766 and some cable TV project asks corporate leaders to disclose information regarding their stance on channels from 7 a.m. to 2 a.m. For more information (in Japanese only), please see environmental issues and measures to protect the environment. http://daiwa766.jp/. *3 UNEP FI: This initiative has been in operation since 1992 with the aim of identifying, promoting and realizing the adoption of best environmental and sustainability practices based on partnerships between the United Nations Environment Programme and financial institutions in various countries. Corporate Citizenship Activities *4 PRI: Investment principles published in April 2006 by the UNEP FI and the United The Daiwa Securities Group engages in a variety of activities to fulfill its Nations Global Compact, which aim to incorporate environmental, social and governance considerations into the investment decision-making process. duty as a good corporate citizen. These activities include supporting education and research related to economics and finance, supporting culture and the arts, and aiding regional communities and the international soci- Inclusion in SRI Indices ety through cooperation with various foundations and NPOs. The Daiwa Securities Group Inc. has been selected for inclusion in the For example, a part of the profits earned from the sale and manage- “Dow Jones Sustainability World Index (DJSI World)” for the eleventh ment of the investment trust “Daiwa Eco Fund” are donated to Japan consecutive year. DJSI World is an SRI stock index devised by Dow Jones for Sustainability (JFS), an NPO with which the Daiwa Securities Indexes (US) and SAM Group (Switzerland), which assesses corporate Group has cooperative ties. The money is used to sponsor a series of sustainability. In addition, since September 2006 the Group has been lectures for students. In addition, the “Daiwa Anglo-Japanese Foun- selected as a component of the “FTSE4Good Index,” an SRI stock index dation” promotes mutual understanding and friendship between operated by the FTSE Group. Japan and the UK, each year inviting Daiwa Scholars from the UK to visit Japan. The “Daiwa Securities Health Foundation” supports research aimed at preventing and treating lifestyle diseases, and works to increase awareness of health maintenance and improvement. In addition, the “Daiwa Securities Foundation” supports a wide range of

Government NPOs/NGOs Local communities Employees and their families

In addition to its normal tax contribu- The Group cooperates with various orga- The branch offices and overseas sub- Employees are essential to the Group’s effort to tions, the Group seeks to contribute nizations through training in economic sidiaries of the Daiwa Securities Group provide value to its other stakeholders; therefore, to a better society by providing advice and financial matters, support during are integral members of the local com- the Group strives to provide them with a rewarding and support to the Government on disasters, and active communication that munities in which they operate, and work environment that allows them to utilize their policy matters. helps the Group incorporate a social work constantly to establish strong, abilities and realize their goals. Family members are commitment and concern into its basic friendly ties to the community. also important stakeholders since they support and management activities. motivate the employees.

daiwa securities group annual report 2010 67 68 daiwa securities group annual report 2010

The Daiwa Securities Group in Figures

p70 Five-Year Financial Summary p71 Breakdown by Business and Geographical Region p72 Twelve-Quarter Financial Summary p74 Operational Data p76 Stock Information

daiwa securities group annual report 2010 69 Th e Da i wa S e c u r i t i e s G roup in Figures Five-Year Financial Summary Daiwa Securities Group Inc. and Consolidated Subsidiaries

Millions of U.S. dollars Millions of yen (Note 1) FY2005 FY2006 FY2007 FY2008 FY2009 FY2009 Operating Performance Operating revenues ¥845,660 ¥917,308 ¥825,422 ¥413,936 ¥537,914 $5,784 Commissions 309,189 306,736 294,425 208,881 252,863 2,718 Net gain on trading 224,912 157,333 103,361 40,921 110,955 1,193 Net gain (loss) on private equity and other investments 21,539 32,818 19,160 (79,478) 75,584 812 Interest and dividend income 245,211 373,453 358,423 192,664 54,729 588 Service fees and other revenues 44,809 46,968 50,053 50,948 43,783 470 Net operating revenues 579,359 526,764 447,491 199,544 458,105 4,925 Operating income (loss) 254,160 186,391 83,632 (143,726) 95,261 1,024 Ordinary income (loss) 260,651 195,415 90,143 (141,150) 102,917 1,106 Income (loss) before income taxes and minority interests 258,356 185,923 81,951 (163,794) 97,382 1,047 Net income (loss) 139,948 92,725 46,411 (85,039) 43,429 466

Millions of U.S. dollars Balance Sheet Millions of yen (Note 1) Total assets ¥14,898,692 ¥14,411,265 ¥17,307,120 ¥14,182,579 ¥17,155,345 $184,466 Private equity and other investments 382,421 440,178 471,732 515,770 218,841 2,353 Property and equipment, at cost (excl. accumulated depreciation) 126,531 134,536 153,393 150,202 142,446 1,531 Investment securities 269,854 269,805 254,716 201,804 246,772 2,653 Owners’ equity 718,723 844,854 801,881 696,296 929,745 9,997 Net assets (Note 2) – 1,223,226 1,082,924 952,329 1,017,529 10,941

U.S. dollars Per Share Data Yen (Note 1) Net income (loss) (Note 3) ¥103.90 ¥67.90 ¥33.69 ¥(63.16) ¥ 26.41 $0.28 Net assets (Note 3) – 665.98 607.64 534.99 530.27 5.70 Cash dividends 34.00 28.00 22.00 8.00 13.00 0.14

Financial Ratios % Return on equity (ROE) (Note 4) 19.4 10.8 5.3 – 5.3 Equity ratio 5.3 6.5 4.7 5.1 5.4

Other Data Total number of employees 12,561 13,264 14,456 15,224 15,450 (Financial advisors) (Note 5) (1,055) (917) (721) (559) 892

Notes: 1. Translations of the Japanese yen amounts into US dollars use an exchange rate of ¥93.00 = US$1.00 (rounded down to the nearest yen), and are provided solely for the convenience of the reader. 2. Accounting data is presented based on the revised accounting standards stipulated in the “Accounting Standard for Presentation of Net Assets in the Balance Sheet,” and reflects the calculations after these revisions. 3. Net income (loss) per share is calculated on the basis of the average number of shares outstanding during the fiscal year. Net assets per share are calculated using the following formula: Net assets per share = (net assets – stock subscription rights – minority interests) / (shares outstanding as of the fiscal year-end – treasury shares as of the fiscal year-end) 4. Return on equity is calculated using the average of equity at the start of the fiscal year and equity at the end of the fiscal year. Equity is calculated as follows: Equity = owners’ equity + valuation and translation adjustments 5. The total number of employees includes individuals employed as financial advisors.

70 daiwa securities group annual report 2010 Breakdown by Business and Geographical Region Daiwa Securities Group Inc. and Consolidated Subsidiaries

Millions of yen FY2005 FY2006 FY2007 FY2008 FY2009 Breakdown of Commission Income by Business Equity ¥120,217 ¥ 98,987 ¥ 84,593 ¥ 56,402 ¥ 56,388 Brokerage commission 118,262 97,062 82,487 54,809 55,010 Other 1,955 1,925 2,106 1,593 1,378 Fixed income 3,202 2,667 2,133 991 698 Asset management 82,404 106,906 136,377 97,001 108,266 Brokerage commission 336 317 464 555 408 Distribution commission 41,799 37,210 39,342 17,968 32,907 Management fee (excluding agency commission) 17,994 33,667 49,332 41,531 42,279 Agency commission 22,275 35,711 47,238 36,947 32,671 Investment banking 82,735 74,986 47,551 34,915 70,648 Underwriting commission (stock and other) 54,066 43,510 14,581 10,122 41,667 Underwriting commission (bond and other) 8,554 9,407 10,371 10,542 12,362 Distribution commission 2,032 1,310 3,230 725 544 Other (M&A commission, etc.) 16,389 19,607 18,851 13,225 15,765 Others 20,631 23,190 23,771 19,572 16,863 Life insurance sales commission 6,302 6,134 6,783 6,946 5,850 Investment enterprise partnership administration fee 4,776 4,981 4,223 3,384 2,628 Other 9,553 12,074 12,765 9,240 8,384 Total commissions ¥309,189 ¥306,736 ¥294,425 ¥208,881 ¥252,863

Net Gain (Loss) on Trading by Business Stock and other ¥124,271 ¥ 31,288 ¥ 11,020 ¥(25,737) ¥ 24,481 Bond, forex and other 100,641 126,045 92,341 66,658 86,474 Net gain on trading ¥224,912 ¥157,333 ¥103,361 ¥ 40,921 ¥110,955

Geographical Segment Information Net operating revenues Japan ¥ 543,196 ¥ 475,174 ¥ 400,523 ¥ 157,295 ¥ 412,215 America 14,286 14,684 14,593 20,905 14,756 Europe 33,758 35,904 21,912 19,610 38,428 Asia & Oceania 12,098 14,729 18,314 11,816 16,269 Operating income (loss) Japan 248,212 172,568 83,525 (143,960) 91,755 America 2,366 1,605 1,550 7,164 2,457 Europe 10,079 8,341 (5,035) (5,104) 1,976 Asia & Oceania 3,626 3,878 3,597 (1,884) (866) Total assets Japan 12,239,143 10,808,697 14,307,375 11,452,445 14,020,482 America 2,807,087 3,372,712 2,990,598 2,293,672 2,389,811 Europe 1,145,934 1,238,352 1,260,014 832,624 1,483,866 Asia & Oceania 72,881 81,732 80,659 72,782 102,135

Results by Group Company (Ordinary Income)*1 Daiwa Securities ¥101,057 ¥74,477 ¥71,026 ¥18,396 ¥40,454 Daiwa Securities Capital Markets 141,582 92,866 1,431 (167,468) 68,754 Daiwa Asset Management 4,435 13,015 17,494 11,613 9,929 Daiwa Institute of Research (3 companies)*2 7,325 9,744 13,379 9,140 7,901 Daiwa SMBC Capital*3 4,800 4,233 (5,321) (5,895) (6,952)

*1 Results by Group company have not been audited by an independent auditor. *2 Figures reflect the sum of earnings from Daiwa Institute of Research Holdings, Daiwa Institute of Research, and Daiwa Institute of Research Business Innovation. *3 Daiwa SMBC Capital changed company name to Daiwa Corporate Investment on July 1, 2010.

daiwa securities group annual report 2010 71 Th e Da i wa S e c u r i t i e s G roup in Figures Twelve-Quarter Financial Summary Daiwa Securities Group Inc. and Consolidated Subsidiaries

FY2007 FY2008 FY2009 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Market Data Nikkei 225 (end of each quarter, yen) 18,138.36 16,785.69 15,307.78 12,525.54 13,481.38 11,259.86 8,859.56 8,109.53 9,958.44 10,133.23 10,546.44 11,089.94 TSE average daily trading value (billions of yen) 3,103 3,090 2,861 2,805 2,522 2,222 1,897 1,445 1,721 1,519 1,464 1,507 Net purchases (sales) by investors on the TSE (billions of yen) Institutions (1,182) 1,216 1,466 1,817 (101) 477 3,941 2,904 (662) (1,094) (164) (930) Individuals (1,949) 117 (875) 606 (468) (108) 988 344 288 (273) (1,233) (1,067) Foreigners 3,810 1,381 (499) (2,058) 2,274 (1,160) (2,786) (2,452) 788 1,467 2,059 2,284 Securities companies (36) (18) (23) 68 7 20 54 36 55 5 (30) (2) Ten-year Japanese government bond yield (end of each quarter, %) 1.865 1.675 1.500 1.275 1.610 1.480 1.165 1.340 1.350 1.295 1.285 1.395 Foreign exchange rates : Yen per U.S. dollar (end of each quarter) 123.13 114.79 112.62 99.90 106.08 106.02 90.27 98.80 96.31 89.76 92.45 93.45

Operating Performance Millions of yen Millions of yen Millions of yen Operating revenues ¥253,982 ¥211,712 ¥215,457 ¥144,268 ¥165,376 ¥131,559 ¥38,564 ¥78,436 ¥132,119 ¥105,631 ¥183,615 ¥116,549 Commissions 79,875 74,562 72,602 67,383 61,792 54,045 49,383 43,658 70,514 58,008 67,256 57,083 Brokerage commission 24,274 22,890 20,503 16,207 17,149 13,299 14,320 10,959 15,255 14,431 12,558 13,595 Underwriting commission 7,435 6,421 5,098 6,514 4,559 3,181 7,636 5,587 24,532 6,965 15,151 7,690 Distribution commission 14,822 9,676 11,421 6,650 7,666 5,361 2,269 3,394 7,298 8,641 10,001 7,509 Other commission 33,342 35,573 35,578 38,011 32,417 32,202 25,157 23,718 23,427 27,971 29,545 28,288 Net gain (loss) on trading 46,749 24,440 41,650 (9,479) 21,300 10,864 (22,849) 31,606 34,712 28,536 7,754 39,951 Net gain (loss) on private equity and other investments 7,996 6,309 723 4,131 (1,007) (15,206) (37,478) (25,785) (1,567) (4,463) 86,532 (4,917) Interest and dividend income 105,893 95,909 87,242 69,377 69,748 69,129 37,525 16,259 16,815 13,792 12,344 11,775 Other sales revenues 13,468 10,489 13,239 12,855 13,541 12,726 11,983 12,696 11,644 9,756 9,726 12,655 Interest expenses 99,362 92,357 83,894 64,169 62,343 64,161 34,774 14,754 15,508 11,340 10,982 9,827 Cost of sales 10,551 7,791 10,136 9,668 10,006 9,301 9,372 9,677 9,247 7,152 7,122 8,627 Net operating revenues 144,068 111,563 121,427 70,431 93,026 58,096 (5,582) 54,003 107,364 87,137 165,509 98,094 Selling, general and administrative expenses 93,619 91,660 92,288 86,290 88,446 89,293 83,606 81,923 86,552 85,569 99,775 90,946 Commission and other expenses 20,301 23,071 20,432 21,592 18,013 17,842 15,380 14,782 14,346 15,943 16,014 15,485 Employees’ compensation and benefits 44,335 38,823 41,038 32,464 37,120 35,605 35,331 33,542 39,938 37,274 52,095 40,642 Occupancy and rental 8,958 9,804 9,709 10,286 11,082 11,505 10,566 10,549 10,555 10,945 10,813 11,724 Data processing and office supplies 6,855 7,474 7,557 7,990 7,836 7,686 7,460 7,174 6,350 6,744 6,174 6,423 Depreciation and amortization 6,368 6,810 7,262 7,605 8,252 8,384 8,767 10,186 9,506 9,545 9,746 10,302 Taxes other than income taxes 2,102 1,792 1,741 1,693 1,816 1,505 1,657 1,575 2,113 1,762 1,689 2,160 Others 4,698 3,883 4,546 4,657 4,324 6,763 4,444 4,112 3,741 3,353 3,242 4,206 Operating income (loss) 50,449 19,902 29,138 (15,858) 4,580 (31,196) (89,189) (27,919) 20,812 1,567 65,733 7,147 Non-operating income 4,129 1,823 2,274 1,419 4,143 907 1,256 1,654 2,814 1,335 2,134 3,053 Non-operating expenses 486 521 902 1,225 402 1,235 2,089 1,658 798 866 (22) 39 Ordinary income (loss) 54,092 21,204 30,511 (15,664) 8,321 (31,525) (90,022) (27,923) 22,827 2,037 67,891 10,160 Extraordinary gains 793 1,140 219 1,481 462 1,829 644 3,485 373 264 106 945 Extraordinary losses 213 2,015 (65) 9,663 3,029 5,585 9,535 10,913 1,053 2,520 2,353 1,298 Income (loss) before income taxes and minority interests 54,672 20,329 30,796 (23,847) 5,754 (35,282) (98,913) (35,351) 22,148 (219) 65,645 9,808 Net income (loss) 27,335 14,739 17,264 (12,928) 5,885 (20,522) (53,039) (17,363) 17,870 1,991 26,366 (2,798)

Note: Based on unaudited financial statements included in the Group’s Consolidated Financial Summary submitted to the Tokyo Stock Exchange.

72 daiwa securities group annual report 2010 FY2007 FY2008 FY2009 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Market Data Nikkei 225 (end of each quarter, yen) 18,138.36 16,785.69 15,307.78 12,525.54 13,481.38 11,259.86 8,859.56 8,109.53 9,958.44 10,133.23 10,546.44 11,089.94 TSE average daily trading value (billions of yen) 3,103 3,090 2,861 2,805 2,522 2,222 1,897 1,445 1,721 1,519 1,464 1,507 Net purchases (sales) by investors on the TSE (billions of yen) Institutions (1,182) 1,216 1,466 1,817 (101) 477 3,941 2,904 (662) (1,094) (164) (930) Individuals (1,949) 117 (875) 606 (468) (108) 988 344 288 (273) (1,233) (1,067) Foreigners 3,810 1,381 (499) (2,058) 2,274 (1,160) (2,786) (2,452) 788 1,467 2,059 2,284 Securities companies (36) (18) (23) 68 7 20 54 36 55 5 (30) (2) Ten-year Japanese government bond yield (end of each quarter, %) 1.865 1.675 1.500 1.275 1.610 1.480 1.165 1.340 1.350 1.295 1.285 1.395 Foreign exchange rates : Yen per U.S. dollar (end of each quarter) 123.13 114.79 112.62 99.90 106.08 106.02 90.27 98.80 96.31 89.76 92.45 93.45

Note: Based on unaudited financial statements included in the Group’s Consolidated Financial Summary submitted to the Tokyo Stock Exchange.

daiwa securities group annual report 2010 73 Th e Da i wa S e c u r i t i e s G roup in Figures Operational Data Daiwa Securities Group Inc. and Consolidated Subsidiaries

Billions of yen (Unless otherwise specified) Billions of yen (Unless otherwise specified) Billions of yen (Unless otherwise specified) FY2007 FY2008 FY2009 Daiwa Securities Group 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Daiwa Securities Group customer assets*1 ¥54,675 ¥54,338 ¥53,032 ¥47,038 ¥50,195 ¥45,878 ¥40,472 ¥39,122 ¥43,426 ¥43,487 ¥42,271 ¥43,809 Equities 29,056 27,349 25,213 21,844 23,215 20,484 18,030 17,067 20,766 20,301 19,962 21,222 Bonds 12,907 13,761 13,876 13,164 13,577 12,386 11,680 12,260 12,407 12,797 12,440 12,277 Investment trusts 8,814 8,721 8,761 7,820 8,223 7,316 5,912 5,806 6,413 6,605 6,769 6,994 Others 3,895 4,506 5,181 4,208 5,178 5,691 4,849 3,988 3,838 3,782 3,098 3,314

Daiwa Securities Net inflow of retail assets*2 ¥741 ¥611 ¥322 ¥276 ¥250 ¥382 ¥303 ¥(104) ¥424 ¥38 ¥69 ¥45 Individuals 414 467 287 357 195 239 310 20 307 51 51 47 Unlisted corporations, etc. 327 144 34 (81) 54 142 (6) (124) 117 (13) 17 (1)

Cash Management Service (CMS) accounts*1 (thousands) 2,862 2,900 2,933 3,022 3,088 3,144 3,222 3,244 3,285 3,323 3,340 3,359

Online trading accounts*1 (thousands) 1,665 1,699 1,729 1,818 1,885 1,941 2,016 2,048 2,089 2,133 2,158 2,183 Assets under custody of online accounts*1 13,004 12,697 12,525 11,141 11,860 10,510 9,184 9,041 10,486 10,584 10,789 11,285 Online transactions (thousands) 2,051 2,052 2,103 1,911 2,004 1,654 2,210 1,676 2,327 1,928 1,462 1,588 Online ratio 79.6% 80.8% 82.6% 84.5% 84.9% 85.7% 84.5% 85.6% 86.1% 85.5% 83.6% 83.4% Online trading value 2,069 2,008 1,948 1,548 1,809 1,273 1,328 1,002 1,639 1,368 979 1,076 Online ratio 62.8% 65.5% 69.7% 73.4% 71.3% 73.4% 70.2% 73.0% 72.8% 70.2% 65.0% 66.9%

“Daiwa Direct” course accounts*1 (thousands) 734 762 788 876 947 1,004 1,072 1,107 1,151 1,195 1,224 1,251 Assets under custody of “Daiwa Direct” accounts*1 2,606 2,563 2,534 2,334 2,585 2,348 2,185 2,143 2,547 2,559 2,581 2,763

Sales of core products Equity investment trusts 638 445 544 311 325 227 105 160 323 431 476 351 Foreign currency-denominated bonds and others 313 303 266 277 251 236 179 228 252 322 305 402

Daiwa Asset Management Net assets under management*1 ¥11,144 ¥10,712 ¥10,547 ¥9,710 ¥10,172 ¥9,306 ¥7,764 ¥7,594 ¥8,147 ¥8,434 ¥8,819 ¥9,165 Equity investment trusts 7,584 7,361 7,138 6,504 6,893 6,080 4,754 4,602 5,125 5,390 5,802 6,217 Bond investment trusts 3,560 3,351 3,409 3,206 3,278 3,226 3,010 2,992 3,022 3,044 3,016 2,947

*1 As of the end of each quarter *2 Net inflow of retail assets = net inflow of cash and securities

74 daiwa securities group annual report 2010 Billions of yen (Unless otherwise specified) Billions of yen (Unless otherwise specified) Billions of yen (Unless otherwise specified) FY2007 FY2008 FY2009 Daiwa Securities Group 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Daiwa Securities Group customer assets*1 ¥54,675 ¥54,338 ¥53,032 ¥47,038 ¥50,195 ¥45,878 ¥40,472 ¥39,122 ¥43,426 ¥43,487 ¥42,271 ¥43,809 Equities 29,056 27,349 25,213 21,844 23,215 20,484 18,030 17,067 20,766 20,301 19,962 21,222 Bonds 12,907 13,761 13,876 13,164 13,577 12,386 11,680 12,260 12,407 12,797 12,440 12,277 Investment trusts 8,814 8,721 8,761 7,820 8,223 7,316 5,912 5,806 6,413 6,605 6,769 6,994 Others 3,895 4,506 5,181 4,208 5,178 5,691 4,849 3,988 3,838 3,782 3,098 3,314

Cash Management Service (CMS) accounts*1 (thousands) 2,862 2,900 2,933 3,022 3,088 3,144 3,222 3,244 3,285 3,323 3,340 3,359

Sales of core products Equity investment trusts 638 445 544 311 325 227 105 160 323 431 476 351 Foreign currency-denominated bonds and others 313 303 266 277 251 236 179 228 252 322 305 402

*1 As of the end of each quarter *2 Net inflow of retail assets = net inflow of cash and securities

daiwa securities group annual report 2010 75 Th e Da i wa S e c u r i t i e s G roup in Figures Stock Information

1. Stock Price and Trading Volume on the Tokyo Stock Exchange (April 1, 2009–March 31, 2010)

(Yen) (Thousand shares)

800 120,000 Stock price (left)

600 90,000

400 60,000

Average daily trading volume (right)

200 30,000

0 0 4/09 5/09 6/09 7/09 8/09 9/09 10/09 11/09 12/09 1/10 2/10 3/10 (Month/year)

2. Major Shareholders (As of March 31, 2010)

Number of % of total shares held outstanding Name (Thousands) shares State Street Bank and Trust Company 505223 100,910 5.77% Japan Trustee Services Bank, Ltd. Trust Account 77,517 4.43% The Master Trust Bank of Japan, Ltd. Trust Account 59,121 3.38% CBNY - Orbis Sicav 31,016 1.77% Sumitomo Mitsui Banking Corporation 30,328 1.73% Japan Trustee Services Bank, Ltd. Trust Account 9 25,928 1.48% Japan Trustee Services Bank, Ltd. The Sumitomo Trust & Banking Retirement Benefit Account 24,888 1.42% State Street Bank and Trust Company 24,444 1.40% CBNY - Orbis Funds 23,195 1.33% Taiyo Life Insurance Company 21,140 1.21%

Notes: 1. Numbers of shares are rounded down to the closest thousand. 2. % of total outstanding shares are rounded off to the second decimal place.

3. Stock Price on the Tokyo Stock Exchange 4. Breakdown of Shareholders (April 1, 2009–March 31, 2010) (As of March 31, 2010)

Others Open High Low Close Average daily trading volume 2.1% ¥448 ¥741 ¥422 ¥492 14,672 thousand shares Japanese individuals 22.1%

Foreign corporations and individuals 42.8%

Japanese financial institutions and insurance companies Other Japanese 28.3% corporations 4.8%

76 daiwa securities group annual report 2010

Financial Section p78 Management’s Discussion and Analysis p88 Consolidated Balance Sheets p90 Consolidated Statements of Income p91 Consolidated Statements of Changes in Net Assets p92 Consolidated Statements of Cash Flows p94 Notes to Consolidated Financial Statements p120 Independent Auditors’ Report

daiwa securities group annual report 2010 77 F i n a n c i a l S e c t i o n Management’s Discussion & Analysis

Macroeconomic Conditions concerning a double-dip recession. In response, the government newly announced additional national expenditures of up to ¥7.2 trillion in Japan December 2009. Recognizing that the successive implementation of E The economy heading toward recovery despite a persistent pump-priming measures coupled with substantially lower tax revenues deflationary trend would cause the budget deficit to swell, the new administration adopted Japan’s real economy continues to show signs of a recovery. This is several initiatives in drawing up its FY2010 budget. With the equally largely attributable to the upswing in manufacturing industry produc- important goal of curtailing the issue of new government bonds, the tion driven by increased export activity since March 2009. In April government introduced a screening process undertaken by the Gov- 2009, the government announced a large-scale ¥15.4 trillion economic ernment Revitalization Unit to identify and eliminate waste in public stimulus package and took steps to alleviate anxiety throughout spending and proposed the reversal of funds deposited in the special employment markets by implementing such policies as an employment account for government loan and investment programs as well as sur- adjustment subsidy. Measures aimed at stimulating increased use of plus funds from the foreign exchange special account, which are in fuel-efficient vehicles as well as environmentally friendly home elec- some circles referred to collectively as “Kasumigaseki’s buried trea- tronic appliances have also given momentum to inventory adjustments sure.” Moreover, in an effort to break free from an overdependence on and an upswing in production in the manufacturing sector while con- fiscal measures and to clarify its policy direction, the government drew tributing to improved consumer sentiment and personal consumption. up its “New Growth Strategy (Basic Policies)” at the end of December For the first time in two years a half years, the Bank of Japan’s Tankan 2009. This strategy aims to create new demand and employment oppor- survey found an improvement in corporate-sector business conditions tunities. In addition to the policy initiatives implemented to date that in June 2009. focused on stimulating domestic consumption by supporting the Following an election for the House of Representatives at the end of household economy, steps are now being taken to cast a keen eye over August 2009, a coalition government comprising the Democratic Party external demand and to harness the benefits to accrue from growth in of Japan, the Social Democratic Party, and the People’s New Party was Asia. In the same month, the Bank of Japan also shared with the gov- formed. Taking immediate steps to overhaul the economic measures ernment its understanding and stance toward deflation and strength- announced by the previous administration in April 2009, the new gov- ened steps toward further easing monetary conditions as a part of its ernment has placed greater emphasis on reducing public investment policy coordination endeavors. Soon after, the Bank of Japan intro- while providing benefits to the household economy. Against this back- duced additional monetary steps in March 2010. drop, the value of the yen appreciated approximately 12% from the end Looking at market sentiment over this period, the Bank of Japan’s of March 2009 to the end of November 2009. This gave rise to concerns Tankan survey in September 2009 identified continued improve- over the downward pressure placed on exports. Combined with fore- ment in the business confidence index particularly among major man- cast cuts to public spending, fears began to emerge from the market ufacturers. The survey in December 2009 indicated that this positive

GDP in Japan (%) 10

-5

-10

-15

-20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2006 FY2007 FY2008 FY2009

Real GDP Nominal GDP Note: The above data comprises seasonally adjusted annual rates. Growth rates may not correspond to rates calculated based on total production. Source: Cabinet Office, Government of Japan

78 daiwa securities group annual report 2010 sentiment had spread to small and medium enterprises (SMEs), a trend effort with respect to policy initiatives in response to the crisis.I n addi- that became more pronounced in the March 2010 survey. Buoyed by the tion to the reduction in interest rates implemented by the central banks implementation of both fiscal and monetary measures as well as the of most countries and the provision of large-scale liquidity, the gov- momentum provided by high rates of economic growth in emerging ernments around the world took steps to support the banking system countries, the global economy has continued to improve. As a result, through guarantees and the injection of public funds. Thanks to these the Japanese economy has continued to experience a steady upswing measures, the excessively tight credit conditions that placed downward despite confronting a variety of risks. pressure on the real economy—which included cutbacks in bank lend- In the meantime, economic recovery remains stalled at an inade- ing, the difficulties in procuring funds from the market that plagued quate level, with the relaxation in supply and demand contributing to leading industrialized countries, and the withdrawal of foreign capital the persistent deflationary trend.U nder these circumstances, and with from emerging nations—were gradually relieved. Furthermore, the the high rates of economic growth in emerging countries driving up results of stress tests in the US announced in May 2009 helped in part commodity prices including crude oil, Japan’s corporate sector is faced to offset some of the misgivings about the stability of the banking sys- with the dilemma of deflationary conditions impacting its sales activi- tem. This in turn served to check further escalation of the financial ties and inflation affecting its procurement activities.T aking these fac- crisis. From a real economy perspective, the unprecedented scale and tors into account, there are concerns that future earnings may decline. speed at which various nations pushed forward fiscal measures designed After an extended period of contraction, the market is finally seeing to stimulate demand also served to ignite a recovery worldwide. In signs of improved performance in the corporate sector and a positive addition to the restocking of inventories in the manufacturing indus- upswing in capital expenditure and new employment. In this context, try, benefits that continue to accrue within the private and other sectors the question confronting the Japanese economy is its ability to realize a include an increase in production volumes, a bottoming out in the drop sustained recovery. in consumer sentiment and retail sales as well as positive corrections in residential market prices. In the October–December 2009 quarter, real Overseas Markets GDP growth rates in the leading industrialized countries of the US, E The global economy entering a growth trajectory led by emerging Japan, Germany, and France remained positive year on year. After an countries extended period of seven consecutive quarters, the real GDP growth In September 2008, Lehman Brothers—at the time one of the largest rate in the UK returned to the black. For their part, emerging countries investment banks in the US—declared bankruptcy, triggering sharp beginning with those in the Asia region continue to enjoy positive and rapid deterioration in the global economy. After reaching its lowest growth. In relative terms, emerging economies shoulder a lighter bur- point during the January–March 2009 quarter, the economy has con- den with respect to excessive debt in the household sector when com- tinued to improve. Under these circumstances and against the back- pared with most industrialized countries. As a result, the benefits of drop of a global recession, all countries were called to make a coordinated economic stimulus packages manifest themselves more easily. This has

Nikkei Average and Trading Value (Yen) (¥ billion) 20,000 5,000

18,000 4,500

16,000 4,000

14,000 3,500

12,000 3,000

10,000 2,500

8,000 2,000

6,000 1,500

4,000 1,000

2,000 500

0 0 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 2007 2008 2009 2010

Nikkei average at month-end (left) TSE average daily trading value (right) Source: Tokyo Stock Exchange, Daiwa Institute of Research

daiwa securities group annual report 2010 79 F i n a n c i a l S e c t i o n

contributed to a virtuous cycle where high rates of economic growth Analysis of Business and prompt capital inflows from leading developed countries which in turn Financial Conditions underpin a robust recovery. In this manner, emerging countries are serving as the driving force that propels the global economy along its Overview growth trajectory. E Return to profit in line with improvements in the operating environment E Concerns about the financial crisis in Euro zone countries, Having emerged from a global-scale crisis, expectations of an economic most notably in Greece recovery grew throughout FY2009. As share prices improved, the Nik- Meanwhile, as the downside risks that have been associated with eco- kei 225 stock average surpassed the ¥10,000 benchmark in June 2009, nomic growth gradually dissipate, the collateral effects of continuing after a hiatus of around eight months. Thereafter, promise of a recovery large-scale pump-priming measures have come under closer scrutiny. in corporate-sector performance and historic highs recorded in over- With the prolonged implementation of economic measures, the poten- seas stock markets provided the momentum for bullish share prices. In tial for inflation rises due to excess liquidity, and an increase in long- the latter half of the year, however, moves to tighten financial regula- term interest rates reflecting deterioration in public finances. For these tions and growing uncertainty surrounding the future of the US econ- and other reasons, the Board of Governors of the Federal Reserve Sys- omy, which led to an appreciation in the value of the yen and a downturn tem in the US completed the purchase of Treasury securities in October in the value of the US dollar, saw shares prices fall back into a down- 2009. In the same month, the Reserve Bank of Australia was the first ward trend. Entering the New Year, improvements in key economic central bank among G-20 countries to lift interest rates. This move to indicators in both the US and China again served to drive up share raise interest rates was followed in quick succession by Norway in prices. Mounting anxiety toward the fiscal state of G reece, on the other December 2009 and India in March 2010. Entering 2010, even China hand, caused markets to fluctuate wildly. On a year-on-year basis, the took steps to ensure its economy did not overheat. In addition to Nikkei 225 stock average as of March 31, 2010 climbed 37% from ¥8,109 increasing the reserve ratio (the proportion of deposits that banks must to close at ¥11,089. On the domestic front, the equity finance of estab- set aside as reserves) on consecutive occasions, efforts were made to lished public companies increased substantially. Under the backdrop of contain the level of new lending and to substantially lower the pace of this business environment, the Group’s performance for the full fiscal public investment increase contained in the national budget compared year under review was robust. Net operating revenues totaled ¥458.1 with the previous year. In this manner, the governments of various billion, ordinary income improved to ¥102.9 billion, and the Group nations have begun to consider ways of withdrawing from those large- posted a net income of ¥43.4 billion. Total dividends for the year were scale economic stimulus packages that emerging countries and increased to ¥13 per share (including an interim dividend of ¥5). resource-rich nations were quick to implement in response to the simultaneous slowdown in the world economy. Analysis of Income Statements Amid all this, fiscal crises surfaced among certain of the smaller states within the Euro zone, most notably in Greece. Under a single currency Net Operating Revenues and financial policy, the economies of less competitive countries are E Increase in overall revenue lines more susceptible to the downward pressures of fluctuations in foreign Net operating revenues surged 129.6% year on year in FY2009, to ¥458.1 currency exchange rates as well as the burdens of excessive fiscal mea- billion. Of this total, revenues from commissions climbed 21.1%, to sures. These issues erupted following the global recession. While an ¥252.8 billion. The Group experienced significant improvement in its agreement was reached to provide Greece with financial support at the investment banking activities due largely to the upswing in capital pro- European Union leaders’ summit held in March 2010, concerns continue curement demand and its role as co-lead manager in several large-scale to mount over the impact on the global economy of a substantial depre- underwriting deals. Revenues from the Group’s asset management ciation in the value of the euro as well as the shift to austere fiscal mea- activities were also robust on the back of brisk sales of new distribution sures throughout the Euro zone. investment trusts. As financial markets returned to normal and the operating environment recovered, net gain on trading jumped 171.1% year on year, to ¥110.9 billion. Net gain (loss) on private equity and other investments returned to the black, mainly due to the capital gain from applications to a tender offer byS anyo Electric Co., Ltd.

80 daiwa securities group annual report 2010 Breakdown of Net Operating Revenues Millions of yen FY2009 FY2008 FY2009 Yoy 1Q 2Q 3Q 4Q Commissions ¥208,881 ¥252,863 21.1% ¥ 70,514 ¥58,008 ¥ 67,256 ¥57,083 Net gain on trading 40,921 110,955 171.1% 34,712 28,536 7,754 39,951 N et gain (loss) on private equity and other investments (79,478) 75,584 – (1,567) (4,463) 86,532 (4,917) Net financial income 16,629 7,070 –57.5% 1,307 2,451 1,362 1,948 Others 12,590 11,632 –7.6% 2,397 2,604 2,603 4,027 Net operating revenues ¥199,544 ¥458,105 129.6% ¥107,364 ¥87,137 ¥165,509 ¥98,094

Note: Quarterly figures have not been audited by an independent auditor.

Breakdown of Commissions by Product and Business Sector E An increase in the amount of equity financing underwriting assets under management. This was more than offset, however, by the generated positive contributions increase in total distribution commissions from launched investment Breaking down revenues from commissions by sector, equity commis- trusts covering emerging countries. sions were essentially unchanged from the previous fiscal year at ¥56.3 The investment banking commissions surged 102.3% year on year, in billion. Despite a contraction in the average daily trading value on the FY2009, to ¥70.6 billion. In the fiscal year under review, the Company Tokyo Stock Exchange during FY2009 of 23.5%, to ¥1,553.5 billion, the served as either co-lead or lead manager for a large number of under- Group successfully expanded its market share. writing deals. As a result, the amount of equity underwriting increased Asset management commissions were up 11.6% year on year, to substantially. Buoyed also by robust activity with respect to the issu- ¥108.2 billion. In FY2009, management fee income from equity invest- ance of straight bonds, the Company experienced a dramatic rise in ment trusts declined in line with a drop in the average balance of net underwriting commissions.

Breakdown of Commissions Millions of yen FY2009 FY2008 FY2009 Yoy 1Q 2Q 3Q 4Q Equity ¥56,402 ¥ 56,388 –0.0% ¥15,647 ¥14,524 ¥12,713 ¥13,681 Fixed income 991 698 –29.6% 160 167 186 183 Asset management 97,001 108,266 11.6% 24,120 27,123 29,462 27,558 Investment banking 34,915 70,648 102.3% 26,612 11,886 20,433 11,715 Others 19,572 16,863 –13.8% 4,153 4,306 4,459 3,943

Note: Quarterly figures have not been audited by an independent auditor.

Breakdown of Commissions

(¥ billion)

16.8 56.3 Equity 70.6 0.6 Fixed income Asset management Investment banking Others

108.2

daiwa securities group annual report 2010 81 F i n a n c i a l S e c t i o n

Net Gain (Loss) on Trading E Substantial year-on-year recovery in both equity and bond trading the market environment. Net gain (loss) on trading and net financial income from trading activ- In the bond trading division, results were fueled by substantial bond- ity are recorded on a managerial accounting basis as revenues (losses) trading activity in the wholesale credit field. This was complemented by from equity and bond trading. In the equity trading division, revenues the robust retail trade of foreign currency-denominated bonds. Taking jumped 92.9% year on year, to ¥40.5 billion, due largely to such factors the aforementioned into account, overall revenues from bond trading as the increase in stock trading value on the back of improvements in climbed 109.1% year on year to reach ¥80.5 billion in FY2009.

Revenues From Equity and Bond Trading Divisions (Net Gain (Loss) on Trading + Net Financial Income, on a Managerial Accounting Basis) Billions of yen FY2009 FY2008 FY2009 Yoy 1Q 2Q 3Q 4Q Equity ¥21.0 ¥ 40.5 92.9% ¥16.5 ¥ 6.0 ¥10.0 ¥ 8.0 Bond 38.5 80.5 109.1% 21.0 26.0 0.5 33.0 Total ¥59.5 ¥121.0 103.4% ¥37.5 ¥32.0 ¥10.5 ¥41.0

Note: Revenues from equity and bond trading divisions have not been audited by an independent auditor

Selling, General and Administrative (SG&A) Expenses E Decrease in commission and other expenses against an increase in supplies contracted 14.8%, year on year, to ¥25.6 billion. Personnel personnel expenses expenses, on the other hand, rose 20.0% year on year, to ¥169.9 billion, Total SG&A expenses for FY2009 increased 5.7% year on year, to ¥362.8 reflecting an increase in the provision for earnings-linked bonus pay- billion. Commission and other expenses declined 6.4% year on year, to ments. Continued IT investments also generated a 9.9% year-on-year ¥61.7 billion, owing largely to cutbacks in advertising expenditure. Fol- rise in depreciation, to ¥39.1 billion. lowing a review of system work outsourced, data processing and office

Revenues from Equity and Bond Trading Divisions (¥ billion) 60

-20

-40 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2006 FY2007 FY2008 FY2009

Bond Equity Note: Net gain (loss) on trading + Net financial income, on a managerial accounting basis

82 daiwa securities group annual report 2010 Ordinary Income and Net Income E Year-on-year turnaround from a loss to a profit billion, impairment losses on fixed assets including employee dormito- The ordinary income account registered a profit of ¥102.9 billion in ries of ¥1.4 billion, and losses on sale or disposal of fixed assets totaling FY2009 compared with a loss in FY2008. In the fiscal year under review, ¥1.0 billion, the Company incurred a net extraordinary loss of ¥5.5 bil- extraordinary gains including gains on sales of investment securities lion. Furthermore, in incorporating the impact of income taxes and totaling ¥0.8 billion were posted. After accounting for such extraordi- minority interests, net income for FY2009 was ¥43.4 billion. nary losses as write-down of investment securities amounting to ¥3.3

Ordinary Income and Net Income Millions of yen FY2009 FY2008 FY2009 Yoy 1Q 2Q 3Q 4Q Ordinary income (loss) ¥(141,150) ¥102,917 – ¥22,827 ¥2,037 ¥67,891 ¥10,160 Net income (loss) (85,039) 43,429 – 17,870 1,991 26,366 (2,798)

Note: Quarterly figures have not been audited by an independent auditor.

Earnings Trends at Major Group Companies E Retail business was robust backed by strong stock subscriptions and investment trusts, which primarily comprise agency commissions gen- sales of equity investment trusts erated from investment trusts, contracted 10.9% year on year, to ¥31.6 Daiwa Securities Co. Ltd., which operates the retail business, saw oper- billion, due to a decline in the average balance of assets under manage- ating revenues climb 21.0% year on year, to ¥193.5 billion, and ordinary ment in investment trusts compared with FY2008. Buoyed by higher income jump 119.9%, to ¥40.4 billion. Equity brokerage commissions trading activity, the number of Daiwa FX accounts (FX margin trad- edged up 1.6% year on year, to ¥32.4 billion, while distribution commis- ing) stood at 39,000 as of March 31, 2010. sions rose sharply from ¥1.8 billion in FY2008 to ¥18.4 billion in FY2009. This was mainly attributable to the upswing in equity finance. E Wholesale operations were bolstered by an increase in underwriting Investment trust distribution commissions increased 84.5% year on activities and the gain on sale of Sanyo Electric Co., Ltd. shares year, to ¥31.7 billion, largely reflecting strong sales of monthly- On a consolidated basis, including the operations of overseas subsid- dividened-payment-type funds that invest in foreign currency-denom- iaries, Daiwa Securities Capital Markets Co., Ltd., which operates the inated bonds and of launched investment trusts that cover emerging wholesale business, experienced a massive jump of 515.8% in operating countries. Within other commissions, commissions received from revenues, to ¥280.2 billion. From a profit perspective, the company

Cost Structure (¥ billion) 120

100

0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2008 FY2009 Depreciation Fixed costs (excluding depreciation) Variable costs

daiwa securities group annual report 2010 83 F i n a n c i a l S e c t i o n

returned to the black, posting ordinary income of ¥68.7 billion. In line a positive turnaround in the earnings environment, trading results with the increase in equity finance, underwriting and distribution were brought back into the black at ¥59.4 billion. Buoyed by the gain on results were robust. As a result, earnings improved dramatically with sales of Sanyo Electric Co., Ltd. shares, following subscriptions to a commissions rising 75.8% year on year, to ¥98.9 billion. Supported by public tender, net gain on private equity and other investments rose financial markets that are returning to normal, which is in turn triggering sharply year on year to ¥89.8 billion.

Earnings Trends at Major Group Companies Millions of yen Daiwa Securities Capital Markets Daiwa Securities Daiwa Asset Management (consolidated) FY2008 FY2009 FY2008 FY2009 FY2008 FY2009 Operating revenues ¥159,883 ¥193,532 ¥ 45,514 ¥280,256 ¥68,157 ¥63,795 Ordinary income (loss) 18,396 40,454 (167,468) 68,754 11,613 9,929 Net income (loss) 9,882 23,229 (144,958) 51,060 6,513 5,920

Millions of yen Daiwa Institute of Research*1 Daiwa SB Investments Daiwa SMBC Capital*2 (Total of 3 companies) FY2008 FY2009 FY2008 FY2009 FY2008 FY2009 Ordinary income (loss) ¥9,140 ¥7,901 ¥2,984 ¥3,189 ¥(5,895) ¥(6,952)

Notes: Group company results have not been audited by an independent auditor. *1 Figures reflect the sum of earnings from Daiwa Institute of Research Holdings, Daiwa Institute of Research, and Daiwa Institute of Research Business Innovation. *2 Daiwa SMBC Capital changed company name to Daiwa Corporate Investment on July 1, 2010.

E Asset management activities impacted by a decline in the average income, ordinary income in the Americas declined 64.5% year on year, balance of net assets under management to ¥1.7 billion. Despite the increase in SG&A expenses, the ordinary Daiwa Asset Management Co., Ltd., which operates the Group’s asset income in Europe showed a profit of ¥1.9 billion in FY 2009 after incur- management business, witnessed its ordinary income decline 14.5%, to ring an ordinary loss in the previous fiscal year. This was mainly ¥9.9 billion. This was primarily attributable to the impact of a year-on- attributable to solid results in investment banking activities and the year drop in the average balance of investment trust net assets under net gain on bond trading. The Asia and Oceania regions returned management on management fees, which contracted 6.5% compared to the black recording a combined ordinary income of ¥60 million. with FY2008. SG&A expenses rose in the regions, but it was offset by an increase in Combined ordinary income of the three companies that comprise equity brokerage commissions. the Daiwa Institute of Research Group decreased 13.6% year on year, to Based on the aforementioned, overseas operations as a whole, the ¥7.9 billion. This was due mainly to the drop in systems commission total ordinary income was ¥3.7 billion. earnings. Daiwa SMBC Capital Co., Ltd. incurred an ordinary loss of ¥6.9 billion owing largely to its posting provisions for investment losses Ordinary Income (Loss) From Overseas Operations, with respect to private equity and other investments. In contrast, ordi- Broken Down by Region nary income at the Group’s equity-method affiliate, Daiwa SB Invest- Millions of yen ments Ltd., increased 6.9% year on year, to ¥3.1 billion. FY2008 FY2009 America ¥4,806 ¥1,707 Overseas Operations Europe (4,898) 1,984 E Earnings recovery in Europe, Asia, and Oceania against a slowdown Asia & Oceania (1,553) 60 across the Americas Total ¥(1,645) ¥3,752 In the Americas, the investment banking business was healthy. The bond business, on the other hand, slowed after robust activity in the previous fiscal year. Taking into account the drop in net financial

84 daiwa securities group annual report 2010 Analysis of Balance Sheets and Cash Flow Cash Flows E Cash inflows from short-term borrowings offset cash outflows from Assets movements in collateralized short-term financing agreements E The balance of trading products and securities-collateralized loans Cash flows from operating activities showed a net outflow of ¥3,259.9 increased billion for FY2009. The major cash inflow from operating activities was Total assets as of March 31, 2010 for the Group stood at ¥17,155.3 bil- income before income taxes and minority interests of ¥97.3 billion. lion, an increase of ¥2,972.7 billion year on year. Current assets rose This was more than offset by principal cash outflows including changes ¥2,959.2 billion, to ¥16,636.2 billion. Of this total, “trading assets” in trading assets and liabilities of ¥979.9 billion and changes in collater- accounted for ¥7,654.3 billion, a year-on-year increase of ¥1,450.5 bil- alized short-term financing agreements of ¥2,628.4 billion. Cash flows lion. Collateralized short-term financing agreements amounted to from investing activities showed a net outflow of ¥237.4 billion. The ¥7,067.4 billion, up ¥1,653.8 billion. The balance of fixed assets edged major component was payments for purchases of investment securities. up ¥13.4 billion year on year, to ¥519.0 billion. Cash flows from financing activities showed a net inflow of ¥3,837.2 billion. In FY2009, the Company undertook an increase in short-term Liabilities borrowings and commercial paper totaling ¥3,422.7 billion. After E Short-term borrowings increased deducting the effect of foreign exchange rate changes on cash and cash Total liabilities climbed ¥2,907.5 billion year on year, to ¥16,137.8 billion equivalents, cash and cash equivalents at end of FY2009 stood at ¥753.9 as of March 31, 2010. The balance of current liabilities stood at ¥14,475.4 billion, an increase of ¥338.3 billion year on year. billion, up ¥2,777.7 billion compared with the end of the previous fiscal year. Main components were trading liabilities, which increased ¥116.1 Cash Flows billion to ¥4,925.2 billion, collateralized short-term financing agree- Millions of yen ments, which fell ¥1,007.0 billion to ¥3,886.2 billion, and short-term bor- FY2008 FY2009 rowings, which grew ¥3,399.3 billion to ¥4,335.4 billion. The balance of Cash flows from operating activities ¥1,519,387 ¥(3,259,900) long-term liabilities stood at ¥1,658.4 billion as of March 31, 2010, up Cash flows from investing activities 9,437 (237,499) ¥130.3 billion year on year. Of this total, straight corporate bonds con- Cash flows from financing activities (1,459,438) 3,837,205 tracted ¥33.8 billion, to ¥1,226.7 billion, while long-term borrowings Cash and cash equivalents at end accounted for ¥378.3 billion, an increase of ¥140.4 billion. of fiscal year ¥ 415,600 ¥ 753,982

Net Assets Capital Investments E Equity increased as a result of the issuance of new shares while TheG roup has been making capital investments aimed at both provid- minority interests decreased due to the acquisition of ing greater convenience to clients and bolstering business competitive equity securities of consolidated subsidiaries prowess. During FY 2009, the Group undertook IT-related investments Total net assets stood at ¥1,017.5 billion as of March 31, 2010, an increase totaling ¥36.4 billion. Among a host of initiatives, this expenditure was of ¥65.1 billion compared with the previous fiscal year-end. Taking directed toward upgrading and expanding online trading products and into account the issuance of new shares as well as the disposition of services as well as introducing a next-generation stock trading system treasury stocks, common stock and capital surplus climbed ¥69.0 bil- developed by the Tokyo Stock Exchange. In the fiscal year under review, lion and ¥72.9 billion, respectively. As a result, the combined balance of Daiwa Securities Co., Ltd. also newly opened Fuchu, Tokorozawa- common stock and capital surplus stood at ¥477.9 billion, an increase of ekimae, and Sagamihara branch offices while consolidating the Mitaka ¥141.9 billion. Major movements in retained earnings included net and Kichijoji branch offices. income of ¥43.4 billion and the payment of ¥12.7 billion in dividends. On this basis, the balance of retained earnings as of the end of FY2009 Capital Procurement Conditions stood at ¥452.4 billion, up ¥30.6 billion year on year. Treasury stock at During FY2009, Daiwa Securities Group Inc., through a public offer- cost was ¥0.6 billion. This was ¥60.8 billion lower than the end of ing on July 15, 2009 and a third-party allotment on August 11, 2009, FY2008 due to the disposition of treasury stock. Net unrealized gain on issued 302,635,000 ordinary shares with a total value of ¥149.7 billion securities, net of tax effect fell ¥31.3 billion, to ¥20.3 billion. Minority and 42,000,000 ordinary shares with a total value of ¥20.7 billion, interests decreased ¥142.5 billion year on year, to ¥87.1 billion, reflect- respectively. TheC ompany made a secondary distribution of 57,865,000 ing the additional acquisition of equity securities of consolidated ordinary shares with a total value of ¥28.6 billion through a disposition subsidiaries. of treasury stocks.

daiwa securities group annual report 2010 85 F i n a n c i a l S e c t i o n

The Company issued Euro-Australian dollar-denominated bonds Unsecured Capital Procurement Conditions and totaling AUD$236 million (with a payment date of January 27, 2010) Liquidity Portfolio at the Group (As of March 31, 2010) and Euro-New Zealand dollar-denominated bonds of NZ$504 million (Billions of yen) Short-term borrowings (with a payment date of January 27, 2010). from banks and other Daiwa Securities Capital Markets Co., Ltd. issued its 1st series of yen- financial institutions ¥ 313 Other short-term denominated unsecured straight bonds totaling ¥30 billion (with a pay- borrowings 455 ment date of July 24, 2009), Nikkei 225 linked yen-denominated Commercial paper 351 callable bonds due February 22, 2013 (“Knock in 50”) totaling ¥13,473 Current portion of bonds 118 million (with a payment date of February 22, 2010), and dual currency- Short-term unsecured capital procurement 1,239 denominated bonds (Yen / Australian dollar) with the provision to Cash and day-to-day call mature in yen and due on August 26, 2010 totaling ¥7,641 million (with loans 699 Government bonds, a payment date of February 26, 2010). government-backed bonds, other 111 Liquidity Liquidity portfolio 810 Other bonds 1,014 Publicly listed shares, other 367 Seeking to maintain both financial efficiency and stability Other 162 TheD aiwa Securities Group’s basic policy for financing is to effectively Supplementary-liquidity portfolio 1,544 secure enough liquidity for continuing business, as the Group main- Liquidity portfolio and tains a very large balance of both financial assets and liabilities, mainly other total ¥2,355 in relation to its securities trading and related businesses. The Group’s methods of fund procurement include unsecured At the end of FY2009, the value of the liquidity portfolio totaled means, such as the issuance of straight corporate bonds, medium-term ¥810.9 billion. The total of the liquidity portfolio and the supplementary- notes, loans from other financial institutions, commercial paper, and liquidity portfolio was ¥2,355.4 billion, which is equivalent to 190.1% of call money. They also include such secured means as gensaki trading total short-term unsecured capital at the end of FY2009. (repurchase agreements) and repo operations. Through the optimal combination of these methods, the Group is engaging in the efficient Group-wide Liquidity Management and stable fund procurement. Daiwa Securities Group Inc. collectively manages and monitors the In order to ensure financial stability and prevent fluctuations in the liquidity of the entire Group under the basic policy of securing an market from affecting the continuation of our business activities, the appropriate level of Group liquidity. Taking into consideration the Group is constantly striving to secure the stability of fund procurement. potential for a crisis to arise that would jeopardize the Group’s ability to From the latter half of FY2008, the Group has been accumulating procure new capital and to reschedule existing debt, the Company liquidity through the market as well as loans from financial institutions, monitors whether the Group maintains a sufficient and adequate in preparation for unforeseen events such as those caused by financial liquidity portfolio to cover its unsecured short-term capital procured. crises or credit crunches. Additionally, as it can be anticipated that In this regard, the Company maintains a structure and system to flexi- such crises may make it difficult to reacquire capital from new and bly supply and allocate capital to Group companies as and when existing sources, the repayment periods of procured capital are required. Accordingly, an integrated structure and system is employed staggered. to ensure the efficient procurement and management of capital. Further, the Group has established policies to manage liquidity. In Nevertheless, each domestic and foreign subsidiary engaged in the order to ensure the ability to procure short-term unsecured capital, the securities business (Daiwa Securities Co., Ltd., Daiwa Securities Capi- Group maintains a liquidity portfolio consisting of cash, deposits, gov- tal Markets Co., Ltd., Daiwa Corporate Investment Co., Ltd., and other ernment bonds, and other highly liquid instruments as well as a supple- Group companies) under the basic policy of the Group, procures capi- mentary-liquidity portfolio consisting of relatively liquid instruments. tal in its own right in accordance with its own business characteristics Details of unsecured short-term capital procured by the Group and its and attributes and maintains a liquidity portfolio essential for continu- liquidity portfolio as of March 31, 2010 are presented briefly as follows. ing business. A structure and system is in place for the status of capital procured and liquidity portfolio maintained by each domestic and foreign subsidiary to be reported to the Company.

86 daiwa securities group annual report 2010 Contingency Plan and Daiwa Securities Capital Markets Co. Ltd. As of June 10, 2010, the The Daiwa Securities Group has prepared a contingency plan in order credit ratings assigned to these Group companies were as follows: to ensure that it is fully prepared to address liquidity risk. Based on this plan, if market conditions should change suddenly and a credit crunch Daiwa Securities Group Inc. ensues, thereby making it difficult to obtain capital through short-term Credit ratings agencies Long-term Short-term unsecured borrowing, steps are taken to ensure ample liquidity. Moody’s Investors Service Baa2 – Daiwa Securities Capital Markets Co., Ltd. raises substantial amounts Standard & Poor’s BBB A-2 of capital for the purpose of holding liquid assets mainly as a part of its Rating and Investment Information trading position activities. Accordingly, its contingency plan is the (R&I) A a-1 most important for the Group. In its efforts to address periods of crisis, Japan Credit Rating Agency (JCR) A+ – and particularly when financial markets are in turmoil, Daiwa Securi- ties Capital Markets Co., Ltd. revises every six months its contingency Daiwa Securities plan, which includes its foreign subsidiaries, consequently establishing Credit ratings agencies Long-term Short-term conditions to be applied and action plans for each contingency and Moody’s Investors Service Baa1 P-2 environment. In this context, measures are in place to procure capital Standard & Poor’s BBB+ A-2 with government bonds, corporate bonds and other securities as a col- Rating and Investment Information lateral, and to sell highly negotiable securities as required. (R&I) A – Daiwa Securities Group Inc. periodically checks and adjusts the con- Japan Credit Rating Agency (JCR) A+ – tingency plans of all Group companies, and when necessary, points out conceivable crisis scenarios that should be addressed, as a result requiring changes to the Group companies’ funding and contingency plans. It Daiwa Securities Capital Markets also takes proactive measures to increase liquidity and reduce assets Credit ratings agencies Long-term Short-term when conditions dictate in order to be prepared for any eventuality. Moody’s Investors Service Baa1 P-2 To better prepare for emergency situations, the Group has also con- Standard & Poor’s BBB+ A-2 cluded commitment line agreements with several financial institutions. Fitch Ratings A- F2 The unused balance under existing commitment line agreements stood Rating and Investment Information at ¥109.3 billion as of March 31, 2010. (R&I) A a-1

Credit Ratings by Major Credit Rating Agencies

Daiwa Securities Group Inc., Daiwa Securities Co. Ltd., and Daiwa Securities Capital Markets Co. Ltd. have been assigned long-term and short-term credit ratings by major credit ratings agencies, both in Japan and overseas. These ratings take into account the impact of multiple factors on the Group’s creditworthiness. The factors considered include current macroeconomic conditions, the business environment and condition of the securities markets, management strategy, the management structure of the Group, the competitive position of Group companies in their respective markets, profitability and profit volatility, cost structure elasticity, the risk management structure, liquidity conditions, capital policy and adequacy of capital, corporate governance, and other considerations. The Group companies that issue securities in order to obtain funds have been assigned credit ratings by leading agencies. These Group companies include Daiwa Securities Group Inc., Daiwa Securities Co. Ltd.,

daiwa securities group annual report 2010 87 F i n a n c i a l S e c t i o n

Consolidated Balance Sheets DAIWA SECURITIES GROUP INC. March 31, 2010 and 2009

Thousands of U.S. dollars Millions of yen (Note 1) ASSETS 2010 2009 2010 Cash and cash deposits: Cash and cash equivalents (Note 7) ¥ 753,982 ¥ 415,600 $ 8,107,333 Cash segregated as deposits for regulatory purposes 291,104 214,455 3,130,151 Time deposits 75,197 9,109 808,570 1,120,283 639,164 12,046,054

Receivables: Loans receivable from customers 66,759 69,593 717,839 Loans receivable from other than customers 19,789 9,146 212,785 Receivables related to margin transactions (Note 3) 185,879 248,059 1,998,699 Other 190,533 352,530 2,048,742 Less: Allowance for doubtful accounts 433 233 4,656 462,527 679,095 4,973,409

Collateralized short-term financing agreements (Note 4) 7,067,400 5,413,526 75,993,548

Trading and private equity investments Trading assets (Notes 6 and 9) 7,654,334 6,203,742 82,304,667 Private equity and other investments (Notes 7 and 9) 218,841 515,770 2,353,129 7,873,175 6,719,512 84,657,796 Trade account receivables, net – 143,309 –

Other assets: Property and equipment, at cost 256,157 254,962 2,754,376 Less: Accumulated depreciation 113,711 104,760 1,222,699 142,446 150,202 1,531,677 Intangible fixed assets 121,579 110,829 1,307,302 Investment securities (Notes 7 and 9) 246,772 201,804 2,653,462 Deferred tax assets (Note 14) 36,151 20,113 388,720 Other 87,686 112,119 942,861 Less: Allowance for doubtful accounts 2,674 7,094 28,753 631,960 587,973 6,795,269

¥17,155,345 ¥14,182,579 $184,466,076

See accompanying notes.

88 daiwa securities group annual report 2010 Thousands of U.S. dollars Millions of yen (Note 1) LIABILITIES AND NET ASSETS 2010 2009 2010 Debt: Short-term borrowings (Notes 9 and 12) ¥ 4,310,695 ¥ 919,346 $ 46,351,559 Commercial paper 351,750 320,400 3,782,258 Long-term debt (Note 12) 1,748,349 1,526,878 18,799,452 6,410,794 2,766,624 68,933,269 Payables: Payables to customers and counterparties (Note 11) 405,009 492,126 4,354,935 Payables related to margin transactions (Notes 3 and 9) 72,766 133,872 782,430 Other 47,713 17,348 513,044 525,488 643,346 5,650,409 Collateralized short-term financing agreements (Note 4) 3,886,235 4,893,262 41,787,473 Trading liabilities (Note 6) 4,925,289 4,809,093 52,960,097 Trade account payables, net 228,042 – 2,452,065 Accrued and other liabilities: Income taxes payable 22,255 1,823 239,301 Deferred tax liabilities (Note 14) 539 18,621 5,796 Accrued bonuses 33,377 12,527 358,892 Retirement benefits (Note 13) 28,478 25,941 306,215 Other 73,412 54,596 789,377 158,061 113,508 1,699,581 Statutory reserves (Note 15) 3,907 4,417 42,011 Total liabilities 16,137,816 13,230,250 173,524,905 Contingent liabilities (Note 16) Net assets: Owners’ equity (Note 17) Common stock, no par value; Authorized - 4,000,000 thousand shares Issued - 1,749,359 thousand shares as of March 31, 2010 247,385 178,324 2,660,054 Capital surplus 230,594 157,679 2,479,505 Retained earnings 452,456 421,819 4,865,118 Treasury stock at cost (690) (61,526) (7,419) 929,745 696,296 9,997,258 Valuation and translation adjustments Net unrealized gain on securities, net of tax effect 20,366 51,752 218,989 Deferred gain on hedges, net of tax effect 316 499 3,398 Translation adjustments (23,263) (28,275) (250,140) (2,581) 23,976 (27,753) Stock subscription rights (Note 18) 3,242 2,369 34,860 Minority interests 87,123 229,688 936,806 Total net assets 1,017,529 952,329 10,941,171 ¥17,155,345 ¥14,182,579 $184,466,076

See accompanying notes.

daiwa securities group annual report 2010 89 F i n a n c i a l S e c t i o n

Consolidated Statements of Income DAIWA SECURITIES GROUP INC. Years ended March 31, 2010, 2009 and 2008

Thousands of U.S. dollars Millions of yen (Note 1) 2010 2009 2008 2010 Operating revenues: Commissions (Note 23) ¥252,863 ¥208,881 ¥294,425 $2,718,957 Net gain on trading (Note 24) 110,955 40,921 103,361 1,193,065 Net gain (loss) on private equity and other investments 75,584 (79,478) 19,160 812,731 Interest and dividend income 54,729 192,664 358,423 588,484 Service fees and other revenues 43,783 50,948 50,053 470,785 537,914 413,936 825,422 5,784,022 Interest expense 47,659 176,034 339,784 512,462 Cost of service fees and other revenues 32,150 38,358 38,147 345,699 Net operating revenues (Note 20) 458,105 199,544 447,491 4,925,861

Selling, general and administrative expenses (Notes 13, 20 and 25) 362,844 343,270 363,859 3,901,548 Operating income (loss) (Note 20) 95,261 (143,726) 83,632 1,024,313

Other income (expenses): Provision for statutory reserves, net (Note 15) 510 3,600 (52) 5,484 Other, net (Note 26) 1,611 (23,668) (1,629) 17,323 2,121 (20,068) (1,681) 22,807 Income (loss) before income taxes and minority interests 97,382 (163,794) 81,951 1,047,120 Income taxes (Note 14): Current 27,450 4,383 40,475 295,161 Deferred 22,413 (22,557) 299 241,000 49,863 (18,174) 40,774 536,161 Minority interests (4,090) 60,581 5,234 (43,978) Net income (loss) ¥ 43,429 ¥ (85,039) ¥ 46,411 $ 466,981

U.S. dollars Yen (Note 1) Per share amounts: Net income (loss) ¥26.41 ¥(63.16) ¥33.69 $0.28 Diluted net income 26.38 – 33.63 0.28 Cash dividends applicable to the year 13.00 8.00 22.00 0.14

See accompanying notes.

90 daiwa securities group annual report 2010 Consolidated Statements of Changes in Net Assets DAIWA SECURITIES GROUP INC. Years ended March 31, 2010, 2009 and 2008

Millions of yen Owners' equity Valuation and translation adjustments Deferred Number of Net unrealized gain (loss) shares of Paid-in money gain (loss) on on hedges, Stock common stock Common Retained Treasury stock for treasury securities, net net of Translation subscription Minority (thousands) stock Capital surplus earnings at cost stock of tax effect tax effect adjustments rights interests Balance at March 31, 2007 1,404,665 ¥178,324 ¥157,679 ¥520,474 ¥(11,628) ¥5 ¥ 75,658 ¥468 ¥ 8,546 ¥ 611 ¥ 293,089 Cash dividends paid (38,788) Net income 46,411 Change in treasury stock, net (346) (50,073) Decrease due to addition of a consolidated subsidiary (172) Other (5) Net changes of items other than owners’ equity (51,188) 333 (17,608) 819 (29,685) Balance at March 31, 2008 1,404,665 178,324 157,679 527,579 (61,701) – 24,470 801 (9,062) 1,430 263,404 Cash dividends paid (20,195) Net loss (85,039) Change in treasury stock, net (250) 175 Decrease due to addition of a consolidated subsidiary (276) Net changes of items other than owners’ equity 27,282 (302) (19,213) 939 (33,716) Balance at March 31, 2009 1,404,665 178,324 157,679 421,819 (61,526) – 51,752 499 (28,275) 2,369 229,688 Issuance of new stocks 344,694 69,061 72,915 Cash dividends paid (12,781) Net income 43,429 Change in treasury stock, net (11) 60,836 Decrease due to addition of a consolidated subsidiary Net changes of items other than owners’ equity (31,386) (183) 5,012 873 (142,565) Balance at March 31, 2010 1,749,359 ¥247,385 ¥230,594 ¥452,456 ¥ (690) ¥ – ¥ 20,366 ¥316 ¥(23,263) ¥3,242 ¥ 87,123

Thousands of U.S. dollars (Note 1) Owners' equity Valuation and translation adjustments Deferred Net unrealized gain (loss) Paid-in money gain (loss) on on hedges, Stock Common Retained Treasury stock for treasury securities, net net of Translation subscription Minority stock Capital surplus earnings at cost stock of tax effect tax effect adjustments rights interests Balance at March 31, 2009 $1,917,462 $1,695,473 $4,535,688 $(661,570) $– $556,473 $5,366 $(304,032) $25,473 $ 2,469,763 Issuance of new stocks 742,592 784,032 Cash dividends paid (137,430) Net income 466,978 Change in treasury stock, net (118) 654,151 Decrease due to addition of a consolidated subsidiary Net changes of items other than owners’ equity (337,484) (1,968) 53,892 9,387 (1,532,957) Balance at March 31, 2010 $2,660,054 $2,479,505 $4,865,118 $ (7,419) $– $218,989 $3,398 $(250,140) $34,860 $ 936,806

See accompanying notes.

daiwa securities group annual report 2010 91 F i n a n c i a l S e c t i o n

Consolidated Statements of Cash Flows DAIWA SECURITIES GROUP INC. Years ended March 31, 2010, 2009 and 2008

Thousands of U.S. dollars Millions of yen (Note 1) 2010 2009 2008 2010 Cash flows from operating activities: Net income (loss) ¥ 43,429 ¥ (85,039) ¥ 46,411 $ 466,978 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 44,648 39,727 28,047 480,086 Allowance for doubtful accounts, net 226 5,559 3,445 2,430 Allowance for retirement benefits, net 2,540 1,925 836 27,312 Stock subscription rights 873 939 819 9,387 Statutory reserves, net (510) (3,600) 51 (5,484) Losses related to investment securities 2,777 22,542 5,240 29,860 Losses related to fixed assets 1,021 1,430 1,952 10,978 Allowance for relocation costs of headquarters office – – 1,354 – Deferred income taxes 22,413 (22,557) 299 241,000 Minority interests 4,090 (60,581) (5,234) 43,978 Changes in operating assets and liabilities: Receivables and payables related to margin transactions 1,074 53,115 174,806 11,548 Other receivables and other payables 15,752 114,052 (147,279) 169,376 Collateralized short-term financing agreements (2,628,410) (569,791) 1,721,872 (28,262,473) Trading assets and liabilities (979,953) 1,871,841 (2,561,539) (10,537,129) Private equity and other investments 174,980 70,732 (76,273) 1,881,505 Other, net 35,150 79,094 22,660 377,957 Total adjustments (3,303,329) 1,604,427 (828,944) (35,519,669) Net cash flows provided by (used in) operating activities (3,259,900) 1,519,388 (782,533) (35,052,691)

Cash flows from investing activities: Increase in time deposits (282,055) (42,212) (120,181) (3,032,849) Decrease in time deposits 213,104 117,044 56,042 2,291,441 Payments for purchases of property and equipment (9,104) (14,900) (34,295) (97,892) Proceeds from sales of property and equipment 628 361 240 6,753 Payments for purchases of intangible fixed aseets (30,272) (36,174) (44,006) (325,505) Payments for purchases of investment securities (265,976) (32,155) (86,731) (2,859,957) Proceeds from sales of investment securities 133,038 16,454 52,909 1,430,516 Purchase of subsidiary’s stock due to change in scope of consolidation (6,626) – – (71,247) Increase (decrease) in long-term loans receivable 6,599 (2,841) (3,655) 70,957 Other, net 3,164 3,860 (9,366) 34,022 Net cash flows provided by (used in) investing activities (237,500) 9,437 (189,043) (2,553,761)

92 daiwa securities group annual report 2010 Thousands of U.S. dollars Millions of yen (Note 1) 2010 2009 2008 2010 Cash flows from financing activities: Increase (decrease) in short-term borrowings and commercial paper 3,422,797 (1,559,873) 945,660 36,804,269 Proceeds from issuance of bonds and notes 164,289 296,344 442,593 1,766,548 Payments for redemption of bonds and notes (90,109) (218,239) (294,317) (968,914) Proceeds from issuance of new stocks 175,166 – – 1,883,505 Increase (decrease) in other long-term debt 148,447 42,625 (2,682) 1,596,204 Payments of cash dividends (12,781) (20,194) (38,787) (137,430) Payments of cash dividends to minority shareholders – (71) (10,894) – Other, net 29,397 (30) (50,486) 316,097 Net cash flows provided by (used in) financing activities 3,837,206 (1,459,438) 991,087 41,260,279

Effect of exchange rate changes on cash and cash equivalents (1,521) (13,847) (13,582) (16,354)

Net increase in cash and cash equivalents 338,285 55,540 5,929 3,637,473 Cash and cash equivalents at beginning of year 415,600 359,851 352,779 4,468,817 Increase in cash and cash equivalents due to merger of a non-consolidated subsidiary – – 655 – Increase in cash equivalents due to addition of a consolidated subsidiary 97 209 488 1,043 Cash and cash equivalents at end of year ¥ 753,982 ¥ 415,600 ¥ 359,851 $ 8,107,333

See accompanying notes.

daiwa securities group annual report 2010 93 F i n a n c i a l S e c t i o n

Notes to Consolidated Financial Statements DAIWA SECURITIES GROUP INC. Years ended March 31, 2010, 2009 and 2008

1. Basis of financial statements The consolidated financial statements include the accounts of Daiwa (Changes in accounting policy) Securities Group Inc. (“the Company”), a Japanese corporation, and its The Company has adopted “Practical Solution on Unification of subsidiaries (collectively “Daiwa”). Daiwa’s principal subsidiaries include: Accounting Policies Applied to Foreign Subsidiaries for Consolidated —Daiwa Securities Co. Ltd. (“Daiwa Securities”) Financial Statements” (Accounting Standards Board of Japan (“ASBJ”) —Daiwa Securities Capital Markets Co. Ltd. Practical Issues Task Force No. 18, “PITF”) from April 1, 2008. Previously (“Daiwa Securities CM”) the accounting policies applied to a parent company and those of for- —Daiwa Asset Management Co. Ltd. (“DAM”) eign subsidiaries are tentatively not required to be uniform, even if the —Daiwa Institute of Research Holdings Ltd. accounting policies locally applied to foreign subsidiaries in their domi- —Daiwa SMBC Capital Co., Ltd. (“DSC”) cile differ from the accounting policies uniformly applied to the parent company and other subsidiaries. Daiwa Securities is the retail-securities arm of Daiwa. This company operates through a network of 119 branches as well as non-face-to-face Under PITF, the accounting policies and procedures applied to a parent channels, including the Internet and a full-fledged call center to provide company and its subsidiaries for similar transactions and events under online and telephone-based securities-related services. Daiwa Securities similar circumstances should be unified for the preparation of the con- CM is the wholesale-securities arm of Daiwa. DAM is the asset manage- solidated financial statements, in principle. Meanwhile, the financial ment company of Daiwa. In addition, Daiwa has several overseas consoli- statements prepared by foreign subsidiaries in accordance with IFRS or dated subsidiaries, mainly engaged in the securities business. the generally accepted accounting principles in the United States (U.S. GAAP) tentatively can be used for the consolidation process with adjust- Daiwa is primarily engaged in the business of a securities broker-dealer, ing certain items such as amortization of goodwill. pursuant to which Daiwa provides services including brokerage, trading, underwriting, strategic advice, product development, and struc- However, this change has no effect on the consolidated financial state- tured finance. In addition, Daiwa provides asset and capital management, ments as of March 31, 2009. principal investment, venture capital, and research through a network in major capital markets and other services. The accompanying consolidated financial statements have been restruc- tured and translated into English (with some additional explanations The Company and its domestic consolidated subsidiaries maintain their described solely for the convenience of the readers outside of Japan) official accounting records in yen and in accordance with the provisions from the consolidated financial statements prepared by the Company in set forth in the Japanese Financial Instruments and Exchange Act and its accordance with Japanese GAAP and filed to the appropriate Local related accounting regulations, and in conformity with generally Finance Bureau of the Ministry of Finance as required by the Financial accepted accounting principles in Japan (“Japanese GAAP”), which are Instruments and Exchange Act. Some supplementary information different in certain respects as to application and disclosure require- included in the statutory Japanese language consolidated financial ments of International Financial Reporting Standards (“IFRS”). The statements, but not considered necessary for fair presentation, is not accounts of overseas consolidated subsidiaries are maintained in con- presented in the accompanying consolidated financial statements. formity with generally accepted accounting principles and practices prevailing in the respective countries of domicile. The accompanying The translations of the yen amounts into U.S. dollars are included solely consolidated financial statements have been prepared by incorporating for the convenience of the reader, using the prevailing exchange rate at the accounts of the domestic companies prepared under Japanese March 31, 2010, which was ¥93 to U.S. $1. The convenience transla- GAAP with the accounts of the overseas subsidiaries maintained on the tions should not be construed as representations that the yen amounts basis described above and adjusting the difference in accounting poli- have been, could have been, or could be, converted into U.S. dollars at cies from Japanese GAAP, if any. this or any other rate of exchange.

94 daiwa securities group annual report 2010 2. Significant accounting policies Consolidation—The consolidated financial statements include the Material inter-company balances, transactions and profits have been accounts of the Company and the entities which are controlled by the eliminated in consolidation. Company, directly or indirectly. Control exists generally when the Com- pany holds more than 50% of the voting rights of the entity. Also, Statements of cash flows—For purposes of the consolidated state- control is regarded to exist when the Company holds 40% or more of ments of cash flows, the Company defines cash equivalents as highly the voting rights of an entity and there are certain facts and circum- liquid investments with original maturities of three months or less. stances which indicate that the Company controls the decision making body of the entity. Trading assets and trading liabilities—Trading assets and liabilities including securities and financial derivatives for trading purposes held Investee entities which meet the conditions of “Guidance on determin- by securities companies are recorded on a trade date basis at fair value ing a subsidiary and an affiliate” (ASBJ Guidance No.22, issued on May in the consolidated balance sheets. Gains and losses-including unreal- 13, 2008) are excluded from the consolidation even though the Com- ized gains and losses, related to transactions for trading purposes are pany has control of them such as; when the investee entity is held for reported as “Net gain on trading” in the accompanying consolidated principal investment or venture capital investment business purposes statements of income. Fair value is determined based on market prices, where the objective for Daiwa to have control of the investee entity is quoted prices, internal pricing models (utilizing indicators of general merely to seek for capital gain opportunities and, Daiwa does not intend market conditions or other economic measurements), or management’s to operate its business with the entity as a part of the group. estimates of amounts to be realized on settlement, assuming current market conditions and an orderly disposition over a reasonable period The Company accounts for its investment by the equity method of of time. Securities owned for non-trading purposes, shown in the accounting if the Company does not have control of an entity but can accompanying consolidated balance sheets as “Cash and cash equiva- exercise significant influence over the entity’s operating and financial lents,” “Private equity and other investments” and “Investment securi- policies. The ability to exercise such significant influence is generally ties,” are discussed below. regarded to exist when the Company holds 20% or more but 50% or less of the voting rights of the entity, or 15% or more of the voting Securities other than trading assets and trading liabilities—Daiwa rights coupled with certain facts and circumstances which indicate that examines the intent of holding investments and classifies those invest- the Company can exercise significant influence over the entity’s operat- ments as (a) securities intended to be held for trading purposes by ing and financial policies. As is with the policy and considerations for non-securities companies which are carried at fair value with recog- consolidation, investee entities which meet the conditions of the new nized unrealized gain or loss included in the consolidated statements of accounting guidance are excluded from the scope of the equity method income, (b) debt securities intended to be held to maturity (“held-to- even though the Company holds significant influence, when the maturity debt securities”) which are carried at amortized cost, and (c) investee entity is held as part of the principal investment or for venture all other securities not classified in any of the above categories (“avail- capital investment business purposes. able-for-sale securities”). Marketable available-for-sale securities are stated at their fair values based on quoted market closing prices with (Changes in accounting policy) unrealized gain or loss reported in a separate component within the The company has adopted “Guidance on determining a subsidiary and net assets on a net-of-tax basis, or other non-marketable investments an affiliate” (ASBJ Guidance No.22, issued on May 13, 2008) from April (non-marketable “available-for-sale securities”) are carried at cost. 1, 2009. This guidance clarified the condition where investments held Investment business partnerships which are regarded as equivalent to for part of the principal investment or venture capital investment busi- securities by Article 2 (2) of the Financial Instruments and Exchange Act ness purpose are excluded from consolidation scope or equity method are reported as “Private equity and other investments” and “Investment of accounting. However, this change has no effect on the consolidated securities” in the accompanying consolidated balance sheets. The share financial statements as of March 31, 2010. of net income of investment business partnerships has been reflected in the consolidated statements of income and the share of net unrealized Goodwill and negative goodwill are amortized under the straight-line gains and losses held by investment business partnerships is directly method within 20 years which is estimated based on the condition in reported in a separate component within the net assets on a net-of-tax each case. In case of no materiality, it is amortized in a lump sum when basis in proportion to the Company and its subsidiaries’ share of the it accrues. investment business partnership. The cost of those investments is determined by the moving average method.

daiwa securities group annual report 2010 95 F i n a n c i a l S e c t i o n

Daiwa holds, as a common practice in Japan, non-marketable equity Allowance for doubtful accounts—Allowance for doubtful accounts securities generally for the purpose of maintaining good relation- is provided for probable losses on loans and receivables, based on the ships with the investee companies and promoting Daiwa’s securities actual historical default rate for general loans, and based on individually businesses. assessed amounts for doubtful and default loans.

Impairment is assessed for investments (including private equity hold- Property and equipment—Property and equipment are stated at the ing). For marketable securities, if the year-end market value declines acquisition cost, net of accumulated depreciation. Daiwa computes 30% or more but less than 50% from the carrying value for individual depreciation principally by the straight-line method over estimated securities, an impairment loss is recognized if there is no chance of useful lives. recoverability in value. Recoverability is assessed whether the decline is temporary by considering the movements of the market price and the Intangible fixed assets—Intangible fixed assets are generally amor- financial conditions of the issuer. If the year-end market value declines tized by the straight-line method. Daiwa computes the amortization 50% or more from the carrying value, then an impairment loss is recog- over estimated useful lives. The useful lives of software of in-house use, nized immediately. For non-marketable equity investments, Daiwa gen- which is the most significant intangible fixed asset, are generally five erally compares the carrying amount and the net asset value of the years. issuing company attributable to Daiwa’s holding share, and recognizes an impairment loss if the net asset value attributable to Daiwa’s holding Leased assets—Leased assets in finance lease transactions other than share is significantly lower from the carrying value and such decline is the ones that transfer ownership to the lessee are amortized under the considered other than temporary. For non-marketable investments of straight-line method over estimated useful lives taken to be leasing “Private equity and other investments,” Daiwa reviews the financial periods and residual values taken to be nil. conditions of the issuers and provides for allowance for possible investment losses, if necessary. (Changes in accounting policy) The Company and its domestic consolidated subsidiaries have adopted Derivatives used for non-trading purpose—Daiwa records deriva- “Accounting Standard for Lease Transactions” (ASBJ Statement No.13) tive financial instruments at fair value except for certain cases as and “Guidance on Accounting Standard for Lease Transactions” (ASBJ described below, and recognizes changes in the fair value as gains or Guidance No. 16) from April 1, 2008. The accounting treatment of losses unless the derivative financial instruments are used for hedging finance lease transactions other than the ones that transfer ownership purposes. Valuation gains or losses on hedging instruments are deferred to the lessee has changed from the manner similar to the accounting in a separate component within the net assets until the gains or losses treatment for ordinary rental transactions to the manner similar to the on the underlying hedged instruments are realized. Plain vanilla hedg- accounting treatment for ordinary sale transactions and are capitalized ing interest swap agreements satisfying the required conditions under as leased assets. Japanese GAAP, are not required to be marked-to-market. Interests received or paid on such exempt interest rate swap agreements for The effect on the consolidated financial statements as of March 31, hedging purposes are accrued without being marked-to-market under 2009 was immaterial. special treatment. Also, certain forward foreign exchange contracts are exempted from marked-to-market valuation. The premium or dis- Finance lease transactions other than the ones that transfer ownership count on such exempt forward foreign exchange contracts used for to the lessee, which started before the fiscal year that “Accounting hedging purposes is allocated to each fiscal term without being Standard for Lease Transactions” (ASBJ Statement No.13) were applied marked-to-market under special treatment. for the first time, were accounted for in the accounting treatment similar to that of ordinary rental transactions. Certain information Collateralized short-term financing agreements—Collateralized regarding these non-capitalized finance lease transactions is contained short-term financing agreements consist of securities purchased under in Note 10. agreements to resell (“resell transactions”) or securities sold under agreements to repurchase (“repurchase transactions”), and securities Impairment—Non-current assets, principally property and equipment, borrowed or loaned. Repurchase transactions and resell transactions leased assets used under finance lease contracts, intangible fixed assets, are carried at their contractual amounts. Securities borrowed or loaned and goodwill are reviewed for impairment whenever events or changes are recorded at the amount of cash collateral advanced or received. in circumstances indicate that a carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying

96 daiwa securities group annual report 2010 amount to future undiscounted net cash flows expected to be gener- for litigation loss is provided for based on the likelihood and estimated ated by the asset or certain asset group. If an asset is considered to be amounts for such losses for the existing claims, based on the current impaired, then an impairment loss is recognized for the difference status, historical experiences and management judgment. between the carrying amount and the fair value of the asset or the related asset group. Income taxes—Income taxes consist of corporation, enterprise and inhabitants’ taxes. The provision for current income taxes is computed Bonuses—Accrued bonuses for employees and directors represent based on the pre-tax income of the Company and each of its consoli- liabilities estimated as of the balance sheet date. dated subsidiaries with certain adjustments, as appropriate. Deferred tax assets and liabilities are recognized for the future tax consequences Share-based payment—Daiwa allocates the share-based compensa- attributable to differences between the financial statements carrying tion costs, which are measured at fair value of the options at grant date, amounts of existing assets and liabilities and their respective tax bases over the period in which the related requisite service is rendered. and operating loss and tax credit carry-forwards, if any. A valuation allowance is recognized for any portion of the deferred tax assets if it is Retirement benefits—The Company and most domestic subsidiaries considered not realizable based on its tax planning, other studies, and have unfunded retirement benefit plans for eligible employees, under reference to certain set requirements under Japanese GAAP. which the benefit amount is determined annually based on the performance during the year in which the related service is rendered, plus Translation of foreign currencies—The Company and its domestic interest earned to date. Accordingly this liability does not change sub- consolidated subsidiaries translate assets and liabilities in foreign cur- sequently due to the changes in compensation level in the subsequent rencies into yen at the year-end exchange rate, and translate income years. The annually earned benefits and the related interest to the accu- and expenses in foreign currencies into yen using generally the appli- mulated benefits are expensed annually. cable exchange rate on the day when the related transaction occurred. Any gains and losses resulting from such translation are included in cur- The Company and most domestic consolidated subsidiaries also have rent income or expense. The financial statements of overseas consoli- defined contribution plans for which annual contribution is charged to dated subsidiaries and affiliates are translated into yen using the expense. year-end exchange rates. Income and expenses are translated at the average exchange rates of the applicable year. Differences in yen The Company and its domestic consolidated subsidiaries closed their amounts arising from the use of different rates are included in adjust- defined benefit plan as of April 1, 1999 and accordingly, no new ments on foreign currency translation in Net assets. employees have been added to the plan and no service cost has been charged for the plan; however, the amounts that then existed are still Net income (loss) per share—Net income (loss) per share of common on the balance sheets until the time the payment is made to related stock is based on the average number of common shares outstanding. employees when they retire. Diluted net income per share is computed based on the average number of common shares outstanding for the year with an adjustment for Retirement benefits for directors and corporate auditors are recognized dilutive stock subscription rights based on the number of shares of com- based on the amount as calculated in accordance with the internal rule. mon stock that would have been issued provided that the outstanding dilutive stock subscription rights were converted at the beginning of the (Changes in accounting policy) year. The diluted net income per share amount for the year ended The new accounting standard, “Partial Amendments to Accounting March 31, 2009 is not presented, since a net loss is reported in the Standard for Retirement Benefits (Part 3)” (ASBJ Statement No.19, consolidated statements of income. issued on July 31, 2008) has been adopted from April 1, 2009. Revenue and cost recognition—Concerning some consolidated domes- However, this change has no effect on the consolidated financial state- tic subsidiaries which engage in made-to-order software, when the out- ments as of March 31, 2010. come of individual contracts is deemed certain during the course of the activity, the domestic subsidiaries apply the percentage-of-completion Allowance for litigation losses—In the normal course of business method to work commencing during the year ended March 31, 2010, Daiwa is subject to claims and litigations resulting from securities and otherwise the completed-contract method is applied. The percentage/ other transactions. The estimation for loss related to such contin- stage of completion at the end of the reporting period is measured by gency events requires inherently significant judgment. The allowance the proportion of the cost incurred to the estimated total cost.

daiwa securities group annual report 2010 97 F i n a n c i a l S e c t i o n

(Changes in accounting policy) the domestic subsidiaries apply the percentage-of-completion method Prior to April 1, 2009, some domestic subsidiaries recognized revenues to work commencing during the year ended March 31, 2010, other- and costs of made-to-order software using the completed-contract wise the completed-contract method is applied. The percentage/stage method. Some domestic subsidiaries have adopted the “Accounting of completion at the end of the reporting period is measured by the Standard for Construction Contracts” (ASBJ Statement No.15, issued proportion of the cost incurred to the estimated total cost. on December 27, 2007) and the “Guidance on Accounting Standard for Construction Contracts” (ASBJ Guidance No.18, issued on Decem- However, this change has no material effect on the consolidated finan- ber 27, 2007) from April 1, 2009. Accordingly, when the outcome of cial statements as of March 31, 2010. individual contracts is deemed certain during the course of the activity,

3. Margin transactions Margin transactions at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Assets: Customers’ margin loans ¥119,475 ¥ 79,094 $1,284,677 Cash deposits as collateral for securities borrowed 66,404 168,965 714,022 ¥185,879 ¥248,059 $1,998,699

Liabilities: Payable to securities finance companies ¥ 5,605 ¥ 3,852 $ 60,269 Proceeds of securities sold for customers’ accounts 67,161 130,020 722,161 ¥72,766 ¥133,872 $782,430

Customers’ margin loans are stated at amounts equal to the purchase amounts of the relevant securities, which are collateralized by customers’ securities and customers’ deposits. Proceeds of securities sold for customers’ accounts are stated at the sales amounts.

4. Collateralized short-term financing agreements Collateralized short-term financing agreements at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Assets: Securities borrowed ¥7,067,400 ¥5,413,526 $75,993,548

Liabilities: Securities sold under agreements to repurchase ¥ 544,340 ¥ 664,743 $ 5,853,118 Securities loaned 3,341,895 4,228,519 35,934,355 ¥3,886,235 ¥4,893,262 $41,787,473

5. Financial instruments (Additional information) Disclosures about Fair Value of Financial Instruments” (ASBJ Guidance Effective from the fiscal year ended March 31, 2010, the Company No.19 revised on March 10, 2008). Information on financial instru- adopted the revised Accounting Standard, “Accounting Standard for ments for the year ended March 31, 2010 required pursuant to the Financial Instruments” (Accounting Standards Board of Japan (“ASBJ”) revised accounting standards is as follows. Statement No. 10 revised on March 10, 2008) and the “Guidance on

98 daiwa securities group annual report 2010 Concerning the situation of financial instruments In the trading business, Daiwa conducts derivative transactions solely (1) Policy for dealing with financial instruments and as a part of structured notes to meet customers’ needs. These Daiwa, the primary businesses of which are investment and financial include transactions which are volatile because of the correlation with services businesses with a core focus on securities related business, is stock indices, foreign exchange rates and interest rates of reference involved in trading and brokerage of securities and derivative products, assets or which tend to move in a complicated manner. Therefore, these underwriting and secondary offering of securities, treating of public carry higher risk than the reference assets. These derivative transactions offering for subscription and secondary offering of securities, treating are categorized as trading assets in the consolidated balance sheets and of private offering for subscription of securities, and other businesses the realized and unrealized profit/loss by fluctuation of fair values are related to the securities and financial fields. The subsidiaries which stated as the net gain on trading. engage in securities related business hold financial assets and liabilities Other than the trading business, Daiwa holds financial instruments as follows to trade with their customers and execute proprietary trades: like private equity and other securities as a result of principal invest- ”trading securities and others” which include equities and warrants, ments business and venture capital business and investment securities bonds and units of investment trust, “derivative” like futures contracts, as long-term holding for the business relationship, etc. These financial options, forward contracts and swaps, “collateralized short-term financ- instruments carry market risk and credit risk as well. ing agreements,” and “receivables and payables related to margin Daiwa raises capital by utilizing corporate bonds, medium-term transactions.” In addition to those, Daiwa holds “private equity and notes, borrowing from financial institutions, etc. by holding Daiwa’s other securities” as a result of principal investments business and ven- financial instruments, and is exposed to liquidity risk. Liquidity risk indi- ture capital business and “investment securities” as long-term holding cates the risk of suffering losses such that cash management may be for the business relationship. impossible or remarkably higher financing cost than usual may be In addition, Daiwa is raising capital by utilizing a variety of financial requested as a result of an abrupt change of market environment or instruments such as corporate bonds, medium-term notes, borrowing unexpected credit crunch, etc. from financial institutions, commercial paper, call market, gensaki trans- The subsidiaries engaged in the trading business enter derivative actions, and repurchase agreements. Under Daiwa’s basic financing transactions as brokers and end-users. Derivative products are neces- policy which is that enough liquidity for continuing business should be sary to deal with a variety of customers’ financial needs and the subsid- effectively secured, Daiwa is maintaining an appropriate balance iaries engaged in the trading business provide customers with financial between assets and liabilities by diversifying financial measures and instruments to meet their requests. For instance, the subsidiaries pro- maturity dates, and realizing effective and stable finance when it vide customers with forward exchange contracts to hedge the exchange decides to raise capital. Also, Daiwa uses interest rate swaps and for- rate risk of foreign currency of foreign bonds held by customers and eign currency swaps, etc. for the purpose of hedging fluctuation of interest rate swaps to hedge interest rates risk when customers issue interest rates and foreign currencies in terms of financial assets and corporate bonds, etc. As end-users, the subsidiaries use interest rate liabilities. swaps to hedge interest rate risk regarding financial assets and liabilities Daiwa entirely and efficiently manages the variety of risks incurred by of Daiwa and utilize many kinds of futures and options to hedge its its holding of such financial assets and liabilities and maintains sound trading positions. finances. (3) Risk management system concerning financial instruments (2) Contents and risk of financial instruments While the economy and social structure have been drastically changed The subsidiaries engaged in the securities business mainly conduct trad- due to globalization and IT advances, the finance business continues to ing business in Daiwa. Categories of products in the trading business be diversified and complicated and the importance of risk management are as follows: (a) trading securities, collateralized short-term financing is increasing in Daiwa as a financial institution. Daiwa recognizes that to agreements, receivables and payables related to margin transactions, properly understand the risk existing in Daiwa and to manage the risk (b) derivatives, traded at exchanges, and (c) OTC derivatives. entirely is a significant target for management and works to construct Of the various risks, the major risks implied in cash and derivative trans- a risk management system for the Group. actions in the trading business are market risk and credit risk. Market risk For risk management of the entire Group, the Company has resolved means the risk of suffering losses from fluctuations in the value of hold- the “Risk Management Rule” at the meeting of the Board of Directors ing financial assets and liabilities in accordance with changes in the mar- which states the basic policy of risk management, type of risk that ket value of equities, interest rates (in case of bonds), currencies, should be managed and responsible executive officers and department commodities and derivatives of those and interest rates. Credit risk means for each major risk. Each subsidiary conducts risk management suitable the risk of suffering losses from defaults of counterparties or credit chang- for each business profile and size in accordance with the basic policy of ing of issuers of financial instruments which Daiwa holds, etc. risk management. The Company unifies risk management of the entire

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Group by monitoring the structure and process of its subsidiaries’ risk regularly conducting back tests which compare VaR and the actual management and giving necessary guidance. Also, the Internal Control profit / loss. And concerning the impact of an abrupt change in the Committee as a sub-committee of the Executive Committee of the market, in order to cover the capacity limit of VaR that is the valuation Company receives reports about risk exposures obtained by monitoring method based on past data and statistical hypothesis, the Company its subsidiaries and themes concerning their risk management system evaluates the maximum loss amount of its portfolio utilizing a scenario and discusses those issues. The company’s subsidiaries regularly hold based on past huge market fluctuation or a scenario in which a certain risk management committee in order to strengthen its risk manage- risk factor vastly changes, etc. ment system. (a) Management of equity risk In addition, Daiwa works on an integrated risk management system Equity risk indicates the risk that Daiwa suffers losses from changes in aiming to secure sufficiently sound finances and properly understand the price of equity related positions caused by fluctuation of the price return in consideration of risk. Daiwa grasps all the market and credit of equity. The equity risk to which Daiwa is mainly exposed is the one risk with the quantitative method as systematically as possible and con- relating to equity related products and derivatives, etc. in the trading trols the risk within the amount suitable for management strength of business. The subsidiaries engaged in securities business manage the Daiwa. Also, the Company allocates risk capital to its subsidiary and the risk by establishing the limit for VaR, position and sensibility (delta, subsidiaries take risks effectively within each risk capital. gamma and vega, etc.) etc. considering their financial situations such as Daiwa has established the risk management system covering the the amount of capital, the business plans and budget of each division. entire Group with the framework of the above stated risk manage- The risk management department of the Company adequacy the equity ment. risk of the entire Group based on the reports on the situations of the (i) Management of credit risk VaR and positions from the subsidiaries engaged in securities business, Concerning transactions in the trading businesses which generate credit and reports it to the management of the Company on a daily basis. risk, Daiwa has established the credit limit based on ratings of counter- (b) Management of interest rate risk parties in advance and has monitored notional principals and credit Interest rate risk means the risk that Daiwa suffers losses from changes amounts. Furthermore, in connection with the wholesale business that in the price of interest rate related position by fluctuation of interest carries a relatively high credit risk, Daiwa has established a credit limit rate. The interest rate risk to which the Group is mainly exposed is the for each of the counterparties based on the credit analysis rating which one relating to interest rate related products and derivatives, etc. in the was obtained by adding qualitative analysis to quantitative analysis uti- trading business. The subsidiaries engaged in securities business man- lizing the rating analysis model and has conducted daily monitoring in age the risk by establishing the limit for VaR, position and sensibility consideration of transaction conditions such as the term, collateral, etc. (BPV, gamma and vega, etc.) etc. considering their financial standings In addition, concerning the credit risk of financial instruments held in such as the amount of capital, business plans and budget of each divi- the trading business, Daiwa has established the upper limit of holding sion. The risk management department of the Company adequacy the and the holding period in accordance with each issuer’s category and interest rate risk of the entire Group based on the reports on the situa- credit rating in relation to the relevant financial instruments, and moni- tions of the VaR and positions from the subsidiaries engaged in securi- tored the status of them. ties business, and reports it to the management of the Company on a In spite of the fact that the margin transactions generate credit to daily basis. customers in Daiwa, customers are charged for deposits set as collat- (c) Management of foreign exchange rate risk eral. In connection with the securities loan transaction, Daiwa has tried Foreign exchange rate risk indicates the risk that Daiwa suffers losses to reduce credit risk by establishing credit limits for its counterparties, from changes in the price of foreign currency position by fluctuation of charging necessary collaterals, and daily mark to market. foreign exchange rate. Foreign exchange rate risk is managed by the (ii) Management of market risk index such as position limit of each currency (delta, gamma and vega) Most of the trading business of Daiwa is exposed to market risk. There- and VaR etc. The risk management department of the Company ade- fore, it would be most important to quantify the effect of fluctuation of quacy the foreign exchange rate risk of the entire Group based on the the market on the value of assets and liabilities held by the Group and reports on the situations of the VaR and positions from the subsidiaries to understand the risk as objectively as possible. engaged in securities business, and reports it to the management of the Considering the above, the Company grasps the market risk of the Company on a daily basis. entire Group based on the position limit on each product, profit/loss (iii) Management of risk of financial instruments other than for trading and Value at Risk (VaR) which indicates the estimate of the maximum purpose loss amount under a certain probability, etc. Concerning VaR, the Com- Other than for its trading business, Daiwa holds of private equity and pany verifies the effectiveness of the valuation model of market risk by other securities for principal investments business and venture capital

100 daiwa securities group annual report 2010 business and investment securities as long-term holding for maintaining occurring. The Group manages liquidity risk by covering short-term debt the business relationships with the investees. These financial instru- financing without collateral by the liquidity portfolio consisting of cash or ments carry market risk and credit risk as well. Since those financial government bonds and the supporting liquidity portfolio that is relatively instruments have a characteristic risk profile for each product, the Com- easy to be changed to cash. pany has conducted limit management by establishing and regularly The Company collectively manages and monitors the liquidity of the monitoring indicators that suit each risk profile (holding amount, entire Group under the basic policy to secure the appropriate liquidity amount for each credit rating, VaR, etc.). of Daiwa. The Company always monitors whether the liquidity portfolio The investment committees in the subsidiaries which engage in the is secured enough against short-term debt financing without collateral principal investments business, perform investigation of investments preparing for the case that it is difficult for Daiwa to execute new under the approved investment limit and make judgments about invest- financing and to refinance the existing financing positions due to a ments. After the executions of investments, the subsidiaries establish financial crisis. Also, Daiwa has established a system that enables the strategies for restructuring governance of invested companies and exit. Company to flexibly supply the capital to its subsidiaries if necessary. Also, the subsidiaries construct a system which enables them to directly However, concerning domestic and foreign subsidiaries engaged in monitor the invested companies, if necessary, by sending personnel to securities business etc. (Daiwa Securities, Daiwa Securities CM, Daiwa the invested companies. SMBC Capital Co. Ltd., and Daiwa Capital Markets Europe Limited, The subsidiaries which engage in the venture capital business, nar- etc.), under the basic policy of Daiwa, each subsidiary raises its capital row investment candidates down to the ones that have innovative tech- by the means suitable for its own business characteristics and secures its nology or business models and perform due diligence to the investment liquidity portfolio necessary to continue its business, and those situa- candidates. The Board of Directors or the investment committees make tions are to be reported to the Company. the investment decisions considering the deliberations from the exami- The Group has established the contingency plan as one of the mea- nation division. After the executions of investments, the subsidiaries sures of dealing with liquidity risk. The Company considers that it could hold a risk management committee every quarter and monitor the situ- secure enough liquidity in the case that it is difficult for Daiwa to raise ations exit strategies and financial influence on the business of invested short term capital without collateral as a result of an abrupt change of companies, etc. market environment or unexpected credit crunch. In connection with investment securities as long-term holding for The financing of Daiwa Securities CM is large because of holding maintaining business relationships with the investees, etc, the Group liquid assets mainly comprised of trading positions. Therefore, its con- decides to acquire or sell the securities under defined by its rules. The tingency plan is the most important for Daiwa. The subsidiary revises its results of monitoring such as portfolio prospects and risk/return profile contingency plan that includes its foreign subsidiaries every 6 months are to be reported quarterly to the Internal Control Committee. and has established conditions to be applied and action plans for each (iv) Management of liquidity risk concerning capital raising market environment. The action plan sets that the subsidiaries needs to The basic policy of financing of Daiwa is to effectively secure enough secure liquidity by taking actions such as financing secured by govern- liquidity in order to continue its business because Daiwa mainly focuses ments bonds and corporate bonds and selling securities that have high its business on the security related business by utilizing large volume of liquidity in the case of emergency. assets and liabilities. The Company periodically monitors the maintenance of its subsidiar- Financing methods of Daiwa include corporate bonds, medium-term ies’ contingency plans. The Company revises, if necessary, the financing notes, borrowing from financial institutions, commercial paper, call plans and contingency plans taking into account critical events to be market, gensaki transactions and repurchase agreements, etc. By the considered and tries to preliminarily execute both increasing the liquid- appropriate combinations of the methods, the Group secures effective ity and reducing assets at the same time. and stable financing. (4) Supplementary explanation for the fair values of financial instruments In terms of financial stability, to manage huge change in market The fair value of financial instruments includes the value based on mar- environment the Group strives in ordinary times to secure appropriate ket prices and the theoretical prices reasonably calculated if no market liquidity necessary to prevent the business from suffering trouble. Espe- price is available. Certain assumptions and conditions are used for such cially after the latter half of FY2007, Daiwa has increased liquidity with calculations. Therefore the results of such calculations may vary with capital raising from the market and borrowing from financial institu- different assumptions and conditions. tions to prepare for the worldwide financial crisis and credit crunch. Also, Daiwa tries to diversify the maturity of raising capital to prepare for the event that it is difficult for Daiwa to execute new capital raising and refinance the existing debt financing due to a financial crisis

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Fair values of financial instruments The amounts stated on the consolidated balance sheet as of March 31, 2010, fair values and the differences between them are as below. Financial instruments whose fair values are extremely difficult to determine are excluded from the below (see Note 2). Millions of yen Amounts on consolidated balance sheet Fair value Difference Assets (1)Cash and cash equivalents and time deposits ¥ 829,179 ¥ 829,179 ¥ – (2)Cash segregated as deposits for regulatory purposes 291,104 291,104 – (3)Trading assets 7,654,334 7,654,334 – (4)Receivables related to margin transactions 185,879 185,879 – (5)Collateralized short-term financing agreements 7,067,400 7,067,400 – (6)Private equity and other investments and Investment securities (a)Securities intended to be held for trading purposes 3,599 3,599 – (b)Held-to-maturity debt securities 1,400 1,398 (2) (c)Subsidiaries companies’ stocks and related companies’ stocks 10,141 10,362 221 (d)Available-for-sale securities 315,389 Allowance for possible investment losses (2,337) 313,052 313,052 – Total assets ¥16,356,088 ¥16,356,307 ¥ 219 Liabilities (7)Trading liabilities ¥ 4,925,289 ¥ 4,925,289 ¥ – (8)Trade account payables, net 228,042 228,042 – (9)Payables related to margin transactions 72,766 72,766 – (10)Collateralized short-term financing agreements 3,886,235 3,886,235 – (11)Payables to customers and counterparties 405,009 405,009 – (12)Payables other 47,713 47,713 – (13)Short-term borrowings 4,310,695 4,310,695 – (14)Commercial paper 351,750 351,750 – (15)Long-term debt 1,748,349 1,761,322 12,973 Total liabilities ¥15,975,848 ¥15,988,821 ¥12,973 Derivative transactions other than trading* Transactions which hedge accounting are not applied ¥ 20 ¥ 20 ¥ – Transactions which hedge accounting are applied – 326 326 Total derivative transactions other than trading ¥ 20 ¥ 346 ¥ 326

* Assets and liabilities which are generated from derivative transactions other than trading are stated on a net basis.

102 daiwa securities group annual report 2010 (Note1) Method of fair value measurement of financial instruments finance companies. Those are deemed to be settled in the short term (1) Cash and cash equivalents and time deposits and stated as their book value because the former is settled by reversing Cash and deposits are stated as their book values since the terms of the trades by customers’ decisions and the latter is collaterals marked to settlement period are short and the fair values approximate the book market on lending and borrowing transactions. values. Payables related to margin transactions consist of customers’ borrowing money from securities finance companies and sold proceeds of securi- (2) Cash segregated as deposits for regulatory purposes ties sold for customers’ accounts generated from margin transactions. Cash segregated as deposits for regulatory purposes which consist of Those are deemed to be settled in the short term and stated as their cash segregated as deposits for customers and investments in securities book value because the former is marked to market and the latter is like government bonds are calculated based on reasonably calculated settled by reversing trades based on customers’ decision. prices utilizing yield spread with index interest rates for each term which are defined by immediately previous traded prices including the ones of (5),(10) Collateralized short-term financing agreements similar bonds. These are stated as their book value since the terms of the settlement period are short and the fair values approximate the book values. (3),(7) Trading assets and liabilities (6) Private equity and other investments and Investment securities (a) Trading securities and others Equities and others closing prices or closing quoted prices at the main stock exchange Equities and others closing prices or closing prices quoted at the main stock exchange Bonds reasonably calculated prices based on the latest traded prices including those of similar bonds (OTC Bonds reasonably calculated price based on immediately and broker screen etc.) or market value information previous traded price including similar bonds (OTC (trading price statistics etc.) by utilizing spreads with and broker screen etc.) or market value information index interest rates, or reasonably calculated prices (trading price statistics etc.) by utilizing spread with based on the value of collateralized assets index interest rates Units of investment closed price or closed quotation of exchange, or Units of investment closing prices or closing quoted prices at the trust net asset value trust exchange, or net asset value Investment in for investment in partnership, for which allowance partnership for possible investment losses is calculated based (b) Derivative transactions on the estimated recoverable values from related real estates, the amount which is calculated by Derivatives traded at mainly liquidation prices at the exchange or basic deducting the allowance from the balance sheet exchange prices for calculation margin amount as of the fiscal year end and approximates Interest rate swaps prices calculated by price valuation models gener- its fair value. Therefore, the amount is deemed to ally acknowledged in the market or extended be its fair value models of them, based on expected cash flows calculated from yield curve, prices and coupon rates of underlying bond, interest rates, discount rates, volatility, correlation, etc. (8) Trading payables, net OTC equity prices calculated by price valuation models gener- Trading payables, net are stated as their book value since the terms of derivatives ally acknowledged in the market or extended the settlement period are short and the fair values approximate the models of those, based on prices of equities or equities indices, interest rates, dividends, volatility, book values. discount rates, correlation, etc. Credit derivatives prices calculated by price valuation models that are generally acknowledged in the market or extended (11),(12) Payables to customers and counterparties and payables other models of them, based on all the cash flows These are mainly composed of “Deposits received” and “Cash deposits defined with discount rates that are calculated from interest rates and credit spread of the reference received as guarantee”. Deposits received are mainly deposits received from customers and payment amount (book value) when settled at the end of this fiscal year Concerning OTC derivatives, both credit risk attributable to the coun- is considered as fair value. Other deposits are stated as their book values terparty and liquidity risk are included into the measurement of the fair since the terms of the settlement period are short and the fair values value if necessary. approximate the book values. Cash deposits received as guarantee are mainly deposits as guaran- (4),(9) Receivables related to margin transactions, Payables related to tee relating to derivative transactions and stated as their book values as margin transactions the terms of the settlement period are deemed to be short with those Receivables related to margin transactions consist of lending money to characteristics which are marked to market for each transaction. Con- customers generated from margin transactions and collaterals to securities cerning the other cash deposits received as guarantee from customers,

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the payment amount (book value) when settled at the end of this fiscal If the market prices are not available, fair values are calculated from book year is considered as fair values. values which are adjusted with consideration of interest rate fluctuations from the issuances and changes of credit spread of the Company. The (13),(14) Short-term borrowings, commercial papers. credit spread of the Company is referred to interest rate of the latest issu- These are stated as their book values since the terms of the settlement ance or market prices of similar bonds issued by the Company, etc. period are short and the fair values approximate the book values. Concerning fair value of long-term debts, these are calculated from book values which are adjusted with consideration of interest rate fluctua- (15) Long-term debt tions from the issuances and changes of credit spread of the Company. Concerning fair values of bonds and notes due within one year, these The credit spread of the Company is referred to interest rates of the latest are stated as their book value since the terms of the settlement period issuance or market prices of similar bonds issued by the Company, etc. are short and the fair values approximate the book values. Concerning fair values of bonds whose maturities are longer than one (16) Derivative transactions other than trading year, in the case that market prices (trading price statistics, etc.) are avail- The accounting method is the same as “(3),(7) Trading assets and liabil- able in the market, fair values are calculated from the market prices. ities (b) Derivative transactions.”

(Note 2) Financial instruments whose fair value are extremely difficult to determine are as below and are not included in the Assets (6) “(c) Subsidiar- ies companies’ stocks and related companies’ stocks”,and “(d) Available-for-sale securities” of fair value information of financial instruments.

Millions of yen Amounts on consolidated balance sheets Subsidiaries companies’ stocks and related companies’ stocks Unlisted equities ¥28,328 Other securities Unlisted equities 94,856 Investments in limited partnership and other similar partnerships 38,800 Others 6,725

The above are deemed to be extremely difficult to determine fair values because there are no market prices and it is extremely difficult to estimate future cash flows from the investments. Therefore, their fair values are not disclosed.

(Note 3) Scheduled redemption amount of financial receivables and securities with a maturity date after March 31, 2010 Millions of yen Within 1 year 1 to 5 years 5 to 10 years Over 10 years Cash and cash equivalents and time deposits ¥ 829,179 ¥ – ¥ – ¥– Cash segregated as deposits for regulatory purposes 291,104 – – – Receivables related to margin transactions 185,879 – – – Collateralized short-term financing agreements 7,067,400 – – – Private equity and other investments and Investment securities Held-to-maturity securities (Corporate bonds) – 1,400 – – Other securities with a maturity date 24,568 5,533 3,500 – Bonds 4,568 5,533 – – Government bonds, municipal bonds, etc. – – – – Corporate bonds 978 5,533 – – Other bonds 3,590 – 3,500 – Other securities 20,000 – – – Total ¥ 8,398,130 ¥ 6,933 ¥ 3,500 ¥–

* Cash segregated as deposits are included in “within 1 year” because they are comprised of trust for holding customer assets. * Receivables related to margin transactions are considered that it is settled in short term, and included “within 1 year”.

104 daiwa securities group annual report 2010 (Note 4) Scheduled redemption amount of corporate bonds, long-term borrowings and other interest-bearing liabilities after March 31, 2010

Millions of yen Within 1 year 1 to 5 years 5 to 10 years Over 10 years Payable to securities finance companies ¥ 5,605 ¥ – ¥ – ¥ – Commercial paper 351,750 – – – Long-term debts 143,226 811,631 141,913 651,579 Total ¥500,581 ¥ 811,631 ¥ 141,913 ¥ 651,579

* Payable to securities finance companies considered that it is settled in short term, and included “within 1 year”.

6. Trading assets and trading liabilities Trading assets and trading liabilities at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Trading assets: Trading securities: Equities ¥ 345,370 ¥ 164,194 $ 3,713,656 Government, corporate and other bonds 5,229,929 3,178,908 56,235,796 Investment trusts 102,754 127,851 1,104,882 Commercial paper, certificates of deposits and others 28,955 93,048 311,344 Derivatives: Option transactions 277,908 267,359 2,988,258 Futures and forward transactions 57,250 105,903 615,591 Swap agreements 1,583,669 2,182,276 17,028,699 Other derivatives 39,604 92,199 425,850 Risk reserves (11,105) (7,996) (119,409) ¥7,654,334 ¥6,203,742 $82,304,667

Thousands of Millions of yen U.S. dollars 2010 2009 2010 Trading liabilities: Trading securities: Equities ¥ 163,548 ¥ 90,385 $ 1,758,581 Government, corporate and other bonds 3,304,824 2,554,291 35,535,742 Investment trusts 253 44 2,720 Derivatives: Option transactions 238,818 269,816 2,567,935 Futures and forward transactions 116,350 289,226 1,251,075 Swap agreements 1,062,518 1,523,596 11,424,925 Other derivatives 38,978 81,735 419,119 ¥4,925,289 ¥4,809,093 $52,960,097

Government, corporate and other bonds include convertible bonds.

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7. Securities other than trading assets and trading liabilities Securities other than trading assets and trading liabilities are included in “Cash and cash equivalents”, “Private equity and other investments” and “Investment securities” in the accompanying consolidated balance sheets.

Cost and fair value of securities intended to be held for trading purposes by non-securities companies as of March 31, 2010 and 2009 consisted of the following: Millions of yen Cost Fair value Difference March 31, 2010 ¥4,438 ¥3,599 ¥(839) March 31, 2009 ¥4,445 ¥3,493 ¥(952)

Thousands of U.S. dollars Cost Fair value Difference March 31, 2010 $47,720 $38,699 $(9,021)

Amortized cost of held-to-maturity debt securities as of March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Corporate bonds ¥1,400 ¥1,300 $15,054

Cost and fair value of marketable available-for-sale securities as of March 31, 2010 and 2009 consisted of the following: Millions of yen Cost Fair value Difference March 31, 2010: Equities ¥111,044 ¥143,537 ¥32,493 Government, corporate and other bonds 13,600 13,602 2 Other 288,339 288,251 (88) ¥412,983 ¥445,390 ¥32,407

March 31, 2009: Equities ¥232,048 ¥376,961 ¥144,913 Government, corporate and other bonds 1,486 1,486 0 Other 14,955 12,066 (2,889) ¥248,489 ¥390,513 ¥142,024

Thousands of U.S. dollars Cost Fair value Difference March 31, 2010: Equities $1,194,022 $1,543,409 $349,387 Government, corporate and other bonds 146,237 146,258 21 Other 3,100,419 3,099,473 (946) $4,440,678 $4,789,140 $348,462

106 daiwa securities group annual report 2010 Non-marketable available-for-sale securities as of March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Equities ¥ 64,544 ¥ 73,889 $ 694,022 Government, corporate and other bonds 1,839 36,129 19,774 Investments business partnerships 37,926 141,388 407,806 Other 4,782 38,571 51,419 ¥109,091 ¥289,977 $1,173,021

8. Derivatives used for non-trading purposes Net unrealized gains of derivatives used for non-trading purposes at March 31, 2010 and 2009 (excluding hedging transactions) consisted of the following: Millions of yen Contract amount Fair value Unrealized gains March 31, 2010: Forward exchange contracts ¥ 484 ¥ (0) ¥ (0) Currency swap agreements ¥6,937 ¥20 ¥20

Millions of yen Contract amount Fair value Unrealized gains March 31, 2009: Forward exchange contracts ¥ 127 ¥ 1 ¥ 1 Interest rate swap agreements 40,000 (51) (51) Currency swap agreements ¥ 7,988 ¥ 33 ¥ 33

Thousands of U.S. dollars Contract amount Fair value Unrealized gains March 31, 2010: Forward exchange contracts $ 5,204 $ (0) $ (0) Currency swap agreements $74,591 $215 $215

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9. Pledged assets Secured obligations at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Short-term borrowings ¥3,726,600 ¥270,443 $40,070,968 Payables related to margin transactions 5,605 3,852 60,269 ¥3,732,205 ¥274,295 $40,131,237

All above obligations at March 31, 2010 and 2009 are secured by the following assets: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Trading assets ¥2,723,331 ¥423,145 $29,283,129 Private equity and other investments – 14 – Investment securities 26,012 61,961 279,699 ¥2,749,343 ¥485,120 $29,562,828

In addition to the above, securities borrowed amounting to ¥1,273,547 million ($13,694,054 thousand) and ¥165,159 million were pledged as guarantees at March 31, 2010 and 2009, respectively.

Total fair value of the securities pledged as collateral at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Securities loaned ¥3,799,164 ¥4,448,294 $40,851,226 Other 1,067,998 1,263,998 11,483,849 ¥4,867,162 ¥5,712,292 $52,335,075

Total fair value of the securities received as collateral at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Securities borrowed ¥7,686,295 ¥5,761,635 $82,648,333 Other 357,910 388,890 3,848,495 ¥8,044,205 ¥6,150,525 $86,496,828

108 daiwa securities group annual report 2010 10. Lease transactions Assets used under finance leases other than the ones that transfer ownership to the lessee at the end of the lease term, which started before March 31, 2008, are accounted for in the same manner as ordinary rental transactions. Certain information concerning such non-capitalized finance leases and operating leases at March 31, 2010 and 2009 are summarized as follows: Thousands of Lessee: Millions of yen U.S. dollars 2010 2009 2010 Non-capitalized finance leases: Total assets under non-capitalized finance leases ¥ 899 ¥ 2,106 $ 9,667 Accumulated depreciation 503 1,482 5,409 Future lease payments in respect of non-capitalized leases 406 636 4,366 Due within one year 153 230 1,645

Operating leases: Future lease payments in respect of operating leases 67,211 71,709 722,699 Due within one year ¥12,646 ¥11,668 $135,978

Thousands of Lessor: Millions of yen U.S. dollars 2010 2009 2010 Operating leases: Future lease receipts in respect of operating leases ¥5,278 ¥1,585 $56,753 Due within one year ¥ 711 ¥ 444 $ 7,645

11. Payables to customers and counterparties Payables to customers and counterparties at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Cash received for customers’ accounts ¥134,456 ¥125,505 $1,445,763 Cash deposits received from customers 246,603 339,891 2,651,645 Other 23,950 26,730 257,527 ¥405,009 ¥492,126 $4,354,935

12. Long-term debt As is customary in Japan, in the case of unsecured bank borrowings, security must be given under certain conditions if requested by a lending bank. The bank has the right to offset cash deposited by the borrower against any debt or obligation that becomes due, and in the case of default and certain other specified events, against all debts payable to the bank. Such request has never been made and such right has never been exercised. The weighted average interest rate on total outstanding short-term borrowings principally from banks at March 31, 2010 and 2009 was 0.63% and 0.60%, respectively.

daiwa securities group annual report 2010 109 F i n a n c i a l S e c t i o n

Long-term debt at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Bond payable in yen: 1.30% due CY2011 ¥ 70,000 ¥ 70,000 $ 752,688 Bond payable in yen: 1.80% due CY2011 50,000 50,000 537,634 Bond payable in yen: 1.65% due CY2011 78,000 78,000 838,710 Bond payable in yen: 1.50% due CY2012 50,000 50,000 537,634 Bond payable in yen: 1.43% due CY2013 60,000 60,000 645,161 Bond payable in yen: 1.66% due CY2013 70,000 70,000 752,688 Bond payable in yen: 2.08% due CY2016 30,000 30,000 322,581 Bond payable in yen: 1.40% due CY2014 30,000 – 322,581 Euro medium-term notes issued by the Company and a domestic consolidated subsidiary, maturing through CY2040 886,421 864,159 9,531,409 Subordinated bond payable in yen: maturing through CY2019 20,700 – 222,581 Subordinated borrowings from banks in yen, maturing through CY2014 121,000 105,000 1,301,075 Long-term borrowings principally from banks in yen, maturing through CY2038 282,117 149,670 3,033,516 Lease obligation 111 49 1,194 ¥1,748,349 ¥1,526,878 $18,799,452

The amount for euro medium-term notes issued by the Company and a domestic consolidated subsidiary as of March 31, 2010 includes $81,450 thousand of foreign currency notes.

Interest rates of euro medium-term notes range from 0.09% to 5.70% at March 31, 2010 and from 0.45% to 4.24% at March 31, 2009. The weighted average interest rate on total outstanding yen subordinated borrowings and borrowings principally from banks at March 31, 2010 and 2009 was 1.39% and 1.70%, respectively. The weighted average interest rate on total outstanding lease obligations at March 31, 2010 was 3.43%.

The aggregate annual maturities of long-term debt as of March 31, 2010 are as follows: Thousands of Year ending March 31 Millions of yen U.S. dollars 2011 ¥ 143,226 $ 1,540,065 2012 218,998 2,354,817 2013 284,249 3,056,441 2014 180,052 1,936,043 2015 128,332 1,379,914 2016 and thereafter 793,492 8,532,172 ¥1,748,349 $18,799,452

Daiwa had an unused commitment line amounting to ¥109,304 million ($1,175,312 thousand) under agreements with several banks at March 31, 2010.

110 daiwa securities group annual report 2010 13. Retirement benefits E Retirement benefits for employees Closed funded plan Unfunded plan The effect on the consolidated financial statements was immaterial. Accumulated contribution plus interest to this unfunded plan are included in “Retirement benefits” in the consolidated balance sheets as E Retirement benefits for directors of March 31, 2010 and 2009, in the amount of ¥25,768 million Directors’ retirement benefits in consolidated subsidiaries of ¥531 mil- ($277,075 thousand) and ¥23,569 million, respectively. Benefit expenses lion ($5,710 thousand) and ¥466 million are included in “Retirement recorded in the consolidated statements of income for the years ended benefits” in the accompanying consolidated balance sheets as of March March 31, 2010, 2009 and 2008 were ¥3,463 million ($37,237 thou- 31, 2010 and 2009, respectively. Benefit expenses recorded in the con- sand), ¥3,399 million and ¥3,157 million, respectively. solidated statements of income for the years ended March 31, 2010, 2009 and 2008 were ¥217 million ($2,333 thousand), ¥193 million and ¥205 million, respectively.

14. Income taxes The Company and its domestic consolidated subsidiaries are subject to a number of taxes levied on income. The effective statutory tax rate in Japan was approximately 40.7% for the years ended March 31, 2010, 2009 and 2008. Overseas consolidated subsidiaries are subject to income taxes of the countries in which they operate.

A reconciliation of the difference between the Japanese statutory income tax rate and the effective income tax rate reflected in the consolidated statements of income for the years ended March 31, 2010 and 2008 are as follows: 2010 2008 Japanese statutory income tax rate 40.7% 40.7% Valuation allowance 9.6 12.4 Permanent difference (Non-deductible) 2.0 2.2 Permanent difference (Non-taxable) (1.2) (1.3) Lower tax rate applicable to income of overseas consolidated subsidiaries (0.2) (0.5) Adjustment of unrealized inter-company profit 8.3 (0.2) Investment in subsidiary company (9.6) – Other, net 1.6 (3.6) Effective income tax rate 51.2% 49.7%

Reconciliation of the difference between the statutory income tax rate and the effective income tax rate for the year ended March 31, 2009 is not presented, since net loss is reported in the consolidated statements of income.

daiwa securities group annual report 2010 111 F i n a n c i a l S e c t i o n

Details of deferred tax assets and liabilities at March 31, 2010 and 2009 are as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Deferred tax assets: Net operating losses carry-forward ¥ 77,265 ¥ 87,011 $ 830,806 Investment in subsidiary company 15,012 – 161,419 Write-down of investment securities 12,524 17,022 134,667 Retirement benefits 11,467 10,420 123,301 Compensation and bonuses 9,490 2,888 102,043 Allowance for doubtful accounts 3,453 4,574 37,129 Impairment losses on fixed assets 7,545 6,980 81,129 Elimination of unrealized gain 5,164 6,517 55,527 Loss on private equity and other investments 9,510 40,671 102,258 Loss on trading 6,853 5,474 73,688 Other 16,851 12,928 181,194 Gross deferred tax assets 175,134 194,485 1,883,161 Less: Valuation allowance (129,510) (130,725) (1,392,580) Total deferred tax assets 45,624 63,760 490,581 Deferred tax liabilities 10,012 62,268 107,655 Net deferred tax assets ¥ 35,612 ¥ 1,492 $ 382,926

The Company and certain consolidated subsidiaries provided valuation deferred tax assets, management considers, as part of its scheduling allowance to reflect the estimated unrealized amount of gross deferred exercise, factors such as expected taxable income, reversal of temporary tax assets. The valuation allowance was provided mainly against differences and utilization of tax loss carry-forwards, and determines deferred tax assets recorded at the Company and Daiwa’s domestic whether it is more likely than not that the assets are not realizable in subsidiaries with tax loss carry-forwards. In assessing the realizability of which case the valuation allowance is provided.

15. Statutory reserves The Financial Instruments and Exchange Act of Japan requires a securities company to set aside a reserve in proportion to its securities transactions and other related trading to cover future eventual operational losses caused by the securities company for customer transactions.

16. Contingent liabilities Daiwa had contingent liabilities amounting to ¥2,502 million ($26,903 thousand) and ¥3,038 million at March 31, 2010 and 2009, respectively, mainly arising as guarantors of employees’ borrowings.

17. Owners' equity In principle, the Companies Act of Japan (“the Act”) requires a com- surplus” until the total becomes one quarter of the common stock (and pany to credit the entire amount of issued shares to common stock (and preferred stock, if any). “Additional paid-in capital” and “Earned sur- preferred stock, if any); however, a company may classify an amount plus” are allowed to be utilized to eliminate or reduce a deficit with a not exceeding one-half of the entire issued amount of shares as addi- resolution of the shareholders’ meeting or may be transferred to com- tional paid-in capital, which is included in capital surplus, with a resolu- mon stock with a resolution of the Board of Directors, and also may be tion of the Board of Directors. transferred to other capital surplus and retained earnings, respectively, which are potentially available for dividends. “Additional paid-in capital” According to the Act, a company should set aside 10% of cash dividends and “Earned surplus” are included in “Capital surplus” and “Retained and other cash appropriations as “Additional paid-in capital” or “Earned earnings” in the accompanying consolidated balance sheets.

112 daiwa securities group annual report 2010 The maximum amount that the Company can distribute as dividends Under Article 459-1 of the Act, the articles of incorporation of the is calculated based on the non-consolidated financial statements of Company stipulate that the Board of Directors is to determine divi- the Company in accordance with the Act. The total amount of retained dends. Cash dividends of ¥5 ($0.05) per share amounting to ¥8,742 earnings available for dividends in the Company’s statutory book million ($94,000 thousand) and ¥8 ($0.09) per share amounting to of accounts as of March 31, 2010 amounted to ¥286,255 million ¥13,988 million ($150,409 thousand) were approved by the Board of ($3,078,011 thousand). Directors on May 19, 2010 and October 30, 2009, respectively.

18. Share-based payment Daiwa has various stock option plans. The shareholders of the Company on June 24, 2005, June 24, 2006, June 23, 2007, June 21, 2008, June 20, 2009, and June 26, 2010 The shareholders of the Company approved granting stock options to approved granting stock options. These options are categorized into directors and certain key employees on June 23, 2004. The plan pro- two types depending on the scope of the individual persons covered by vides for the issuance of up to 4,500 thousand shares in the form of the plans and exercise conditions. The first is the stock subscription options to directors and executive officers, and the amount paid in rights that were issued free to directors and executive officers of the upon exercise of such subscription rights is ¥756 per share. The options Company, its subsidiaries and its affiliated companies, and the amount may be exercised during the period from July 1, 2006 until August 31, paid in upon exercise of such subscription rights is ¥1 per share. The 2011. On the same day, the shareholders’ meeting of the Company second is the stock subscription rights that shall be issued to directors, approved a change in the articles of incorporation so that the Company executive officers and certain employees of the Company, its subsidiar- may be entitled to repurchase its shares by the resolution of its Board of ies and its affiliated companies, excluding the persons to whom the first Directors. stock subscription rights were issued. The amount paid in upon exercise of such subscription rights shall be determined based on the market price of the Company’s common stock at the time of the issuance of such subscription rights.

The date of approval at the shareholders’ meeting, the balance of the exercisable options, exercise price and exercise period for the stock options of the Company at March 31, 2010 are as follows:

Date of approval at the Balance of the exercisable options Exercise price shareholders’ meeting (The number of shares) (Yen/share (U.S. dollars/share)) Exercise period June 23, 2004 1,509,000 ¥ 727 ($ 7.82) from July 1, 2006 to August 31, 2011 June 24, 2005 469,000 ¥ 1 ($ 0.01) from July 1, 2005 to June 30, 2025 1,854,000 ¥ 750 ($ 8.06) from July 1, 2007 to August 31, 2012 June 24, 2006 280,000 ¥ 1 ($ 0.01) from July 1, 2006 to June 30, 2026 – ¥1,455 ($15.65) from July 1, 2011 to June 23, 2016 June 23, 2007 296,000 ¥ 1 ($ 0.01) from July 1, 2007 to June 30, 2027 – ¥1,176 ($12.65) from July 1, 2012 to June 22, 2017 June 21, 2008 344,000 ¥ 1 ($ 0.01) from July 1, 2008 to June 30, 2028 – ¥ 881 ($ 9.47) from July 1, 2013 to June 20, 2018 June 20, 2009 664,000 ¥ 1 ($ 0.01) from July 1, 2009 to June 30, 2029 – ¥ 496 ($ 5.33) from July 1, 2014 to June 19, 2019

19. Capital adequacy requirements In Japan, a securities company is subject to risk-based capital adequacy ratios of Daiwa Securities were 393.3% (unaudited) and 390.7% rules established and administered by the Financial Services Agency. (unaudited) for March 31, 2010 and 2009, respectively, and those of Securities subsidiaries report their capital adequacy ratio as defined pur- Daiwa Securities CM were 378.3% (unaudited) and 343.9% (unau- suant to these rules. The authorities will take certain administrative dited) for March 31, 2010 and 2009, respectively. measures if such ratio declines below 140%. The capital adequacy

daiwa securities group annual report 2010 113 F i n a n c i a l S e c t i o n

20. Segment information Daiwa operates predominantly in a single industry segment. Daiwa’s distribution of securities, (4) other business related to securities transac- primary business activities include (1) trading in securities and deriva- tions and (5) private offering of securities. tives, (2) brokerage of securities and derivatives, (3) underwriting and

A summary of revenues by geographic area for the years ended March 31, 2010, 2009 and 2008 and a summary of total assets by geographic area at March 31, 2010 and 2009 are as follows: Millions of yen Elimination or Japan America Europe Asia & Oceania unallocated Consolidated Year ended March 31, 2010: Net operating revenues: Outside customer ¥ 407,441 ¥ 10,826 ¥ 28,174 ¥ 11,664 ¥ – ¥ 458,105 Inter-segment 4,774 3,930 10,254 4,605 (23,563) – Total 412,215 14,756 38,428 16,269 (23,563) 458,105 Selling, general and administrative expenses 320,460 12,299 36,452 17,135 (23,502) 362,844 Operating income (loss) ¥ 91,755 ¥ 2,457 ¥ 1,976 ¥ (866) ¥ (61) ¥ 95,261

At March 31, 2010: Total assets by geographic area ¥14,020,482 ¥2,389,811 ¥1,483,866 ¥102,135 ¥(840,949) ¥17,155,345

Year ended March 31, 2009: Net operating revenues: Outside customer ¥ 156,645 ¥ 19,673 ¥ 13,601 ¥ 9,625 ¥ – ¥ 199,544 Inter-segment 650 1,232 6,009 2,191 (10,082) – Total 157,295 20,905 19,610 11,816 (10,082) 199,544 Selling, general and administrative expenses 301,255 13,741 24,714 13,700 (10,140) 343,270 Operating income (loss) ¥ (143,960) ¥ 7,164 ¥ (5,104) ¥ (1,884) ¥ 58 ¥ (143,726)

At March 31, 2009: Total assets by geographic area ¥11,452,445 ¥2,293,672 ¥832,624 ¥72,782 ¥(468,944) ¥14,182,579

Year ended March 31, 2008: Net operating revenues: Outside customer ¥406,520 ¥10,195 ¥13,448 ¥17,328 ¥ – ¥447,491 Inter-segment (5,997) 4,398 8,464 986 (7,851) – Total 400,523 14,593 21,912 18,314 (7,851) 447,491 Selling, general and administrative expenses 316,998 13,043 26,947 14,717 (7,846) 363,859 Operating income (loss) ¥ 83,525 ¥ 1,550 ¥ (5,035) ¥ 3,597 ¥ (5) ¥ 83,632

114 daiwa securities group annual report 2010 Thousands of U.S. dollars Elimination or Japan America Europe Asia & Oceania unallocated Consolidated Year ended March 31, 2010: Net operating revenues: Outside customer $ 4,381,086 $ 116,409 $ 302,946 $ 125,420 $ – $ 4,925,861 Inter-segment 51,333 42,258 110,258 49,516 (253,365) – Total 4,432,419 158,667 413,204 174,936 (253,365) 4,925,861 Selling, general and administrative expenses 3,445,806 132,248 391,957 184,247 (252,710) 3,901,548 Operating income (loss) $ 986,613 $ 26,419 $ 21,247 $ (9,311) $ (655) $ 1,024,313

At March 31, 2010: Total assets by geographic area $150,757,882 $25,696,903 $15,955,548 $1,098,226 $(9,042,484) $184,466,075

Geographic overseas revenues for the years ended March 31, 2010, 2009 and 2008 are as follows: Millions of yen America Europe Asia & Oceania Total Year ended March 31, 2010: Overseas revenues ¥16,512 ¥22,069 ¥5,799 ¥44,380 Net operating revenues 458,105 Percentage of net operating revenues 3.6% 4.8% 1.3% 9.7%

Year ended March 31, 2009: Overseas revenues ¥26,092 ¥14,005 ¥10,163 ¥50,260 Net operating revenues 199,544 Percentage of net operating revenues 13.1% 7.0% 5.1% 25.2%

Year ended March 31, 2008: Overseas revenues ¥19,169 ¥10,048 ¥15,281 ¥44,498 Net operating revenues 447,491 Percentage of net operating revenues 4.3% 2.2% 3.4% 9.9%

Thousands of U.S. dollars America Europe Asia & Oceania Total Year ended March 31, 2010: Overseas revenues $177,548 $237,301 $62,355 $477,204 Net operating revenues 4,925,861 Percentage of net operating revenues 3.6% 4.8% 1.3% 9.7%

daiwa securities group annual report 2010 115 F i n a n c i a l S e c t i o n

21. Transactions with related parties The information on subsidiary’s material transactions with related parties and individuals for the years ended March 31, 2010 and 2009, and the resulting account balances with such related party at the balance sheet dates are as follows:

Paid-in Description of transactions Accounts balances Capital Percentage of Name of Millions voting rights Millions of yen related company of yen for the related company 2010 Continual transactions of Collateralized short-term Tokyo Tanshi (Totan Holdings Co., collateralized short-term financing agreements Co., Ltd. ¥10,000 Ltd. subsidiary) financing agreements (assets) ¥173,858 Interest dividend income ¥13 Receivables-Other 4 Accrued and other Interest expense 8 liabilities-Other 2

Millions of yen 2009 Continual transactions of Collateralized short-term collateralized short-term financing agreements financing agreements (liabilities) ¥157,058 Interest dividend income ¥ 4 Receivables-Other 2 Accrued and other Interest expense 16 liabilities-Other 4

Thousands of U.S. dollars 2010 Continual transactions of Collateralized short-term collateralized short-term financing agreements financing agreements (assets) $1,869,441 Interest dividend income $140 Receivables-Other 43 Accrued and other Interest expense 86 liabilities-Other 22

Daiwa has 17.43% of direct voting rights for Totan Holdings Co., Ltd. which is the parent company of Tokyo Tanshi Co., Ltd. There was no material transaction with related parties and individuals for the year ended March 31, 2008.

22. Special purpose entities subject to disclosure Daiwa utilized 6 special purpose entities for the year ended March 31, any shares with voting rights in any of these special purpose entities and 2010 (5 for year ended March 31, 2009) principally for the securitiza- has not dispatched any director or employee to them. Notes issued by tion of structured notes in order to support securitization of monetary those special purpose entities subject to disclosure as of the fiscal year assets of customers. Daiwa acquires and transfers bonds to those spe- ended March 31, 2010 and 2009 are ¥166,032 million ($1,785,290 cial purpose entities (incorporated in the Cayman Islands) and issues thousand) and ¥191,410 million, respectively. structured notes collateralized by those bonds. Daiwa does not own

116 daiwa securities group annual report 2010 23. Commissions Commissions derived from each department for the years ended March 31, 2010, 2009 and 2008 are as follows: Millions of yen Fixed income Investment Investment Equity (Bond) trust banking Others Total Year ended March 31, 2010: Brokerage ¥55,010 ¥302 ¥ 408 ¥ – ¥ 121 ¥ 55,841 Underwriting – – – 54,339 – 54,339 Distribution – – 32,907 544 – 33,451 Other 1,378 396 74,951 15,765 16,742 109,232 ¥56,388 ¥698 ¥108,266 ¥70,648 ¥16,863 ¥252,863

Year ended March 31, 2009: Brokerage ¥54,809 ¥364 ¥ 555 ¥ – ¥ – ¥ 55,728 Underwriting – – – 20,965 – 20,965 Distribution – – 17,968 725 – 18,693 Other 1,593 627 78,478 13,225 19,572 113,495 ¥56,402 ¥991 ¥97,001 ¥34,915 ¥19,572 ¥208,881

Year ended March 31, 2008: Brokerage ¥82,487 ¥ 925 ¥ 464 ¥ – ¥ – ¥ 83,876 Underwriting – – – 25,470 – 25,470 Distribution – – 39,342 3,230 – 42,572 Other 2,106 1,208 96,571 18,851 23,771 142,507 ¥84,593 ¥2,133 ¥136,377 ¥47,551 ¥23,771 ¥294,425

Thousands of U.S. dollars Fixed income Investment Investment Equity (Bond) trust banking Others Total Year ended March 31, 2010: Brokerage $591,505 $3,247 $ 4,387 $ – $ 1,302 $ 600,441 Underwriting – – – 584,290 – 584,290 Distribution – – 353,839 5,849 – 359,688 Other 14,818 4,258 805,925 169,516 180,021 1,174,538 $606,323 $7,505 $1,164,151 $759,655 $181,323 $2,718,957

daiwa securities group annual report 2010 117 F i n a n c i a l S e c t i o n

24. Net gain on trading Net gain on trading for the years ended March 31, 2010, 2009 and 2008 are as follows:

Thousands of Millions of yen U.S. dollars 2010 2009 2008 2010 Equity and other ¥ 24,481 ¥(25,737) ¥ 11,020 $ 263,237 Bond, forex and other 86,474 66,658 92,341 929,828 ¥110,955 ¥ 40,921 ¥103,361 $1,193,065

25. Selling, general and administrative expenses Major components of selling, general and administrative expenses for the years ended March 31, 2010, 2009 and 2008 are summarized as follows:

Thousands of Millions of yen U.S. dollars 2010 2009 2008 2010 Employees’ compensation and benefits ¥169,951 ¥141,600 ¥156,662 $1,827,430 Commissions and brokerage 31,038 33,696 45,671 333,742 Communications 20,806 21,045 22,166 223,720 Occupancy and rental 44,038 43,704 38,759 473,527 Data processing and office supplies 25,693 30,157 29,878 276,269 Taxes other than income taxes 7,726 6,554 7,330 83,075 Depreciation and amortization 39,101 35,590 28,047 420,441 Other 24,491 30,924 35,346 263,344 ¥362,844 ¥343,270 ¥363,859 $3,901,548

26. Other income (expenses) Details of “Other, net” in the accompanying consolidated statements of income for the years ended March 31, 2010, 2009 and 2008 are as follows:

Thousands of Millions of yen U.S. dollars 2010 2009 2008 2010 Gains on sales of investment securities ¥ 871 ¥ 2,330 ¥ 3,228 $ 9,366 Losses on sales of investment securities (302) (60) (205) (3,247) Write-down of investment securities (3,346) (24,812) (8,263) (35,978) Gains or losses on sale or disposal of fixed assets (1,085) (1,430) (1,415) (11,667) Equity in earnings of affiliates 608 (1,106) 1,738 6,538 Impairment losses on fixed assets (1,464) (452) (537) (15,742) Relocation costs of headquarters office – – (1,354) – Other 6,329 1,862 5,179 68,053 ¥ 1,611 ¥(23,668) ¥(1,629) $ 17,323

118 daiwa securities group annual report 2010 27. Subsequent events Granting stock options—The shareholders of the Company approved (2) Legal form of business combination the issuance of the stock subscription rights as stock options on June (i) Demerger of a part of DSC’s business to NS Capital Co., Ltd. 26, 2010. In accordance with Articles 236, 238 and 239 of the Compa- (“NSCAP”, a wholly owned subsidiary of DSC) nies Act of Japan, the stock subscription rights were issued free to direc- (ii) Acquisition of DSC shares after the demerger and transfer of NS tors, executive officers and employees of the Company and its affiliated Capital shares companies, and the amount paid in upon exercise of such subscription (3) Name of Combined company, and outline and purpose of the trans- rights is ¥1 ($0.01) per share. action Daiwa is planning to partially transfer the rights and obligations of the (Dissolution of Venture Capital Joint Venture)—The Company, DSC’s business to NSCAP (hereinafter “The Demerger”) . Following The Sumitomo Mitsui Financial Group, Inc. (“SMFG” and, together with its Demerger, the shares of DSC is supposed to be wholly transferred to subsidiaries and affiliates “SMFG Group”) and Sumitomo Mitsui Bank- Daiwa, and those of NSCAP to SMFG Group and third party investors. ing Corporation (“SMBC”) have reached an agreement on May 19, 2010 to terminate the joint venture contract dated May 13, 2005 2. Accounting method regarding DSC. This dissolution is scheduled to be executed on July 1, The above transactions are to be accounted for as transactions under 2010, and consequently DSC is planning to change its corporate name common control and a transaction with minority shareholders based on to “Daiwa Corporate Investment Co., Ltd”. the “Accounting Standard for Business Combinations” (the Business Accounting Council, December 26, 2008) and the “Implementation 1. Business subject to combination, legal form of business combination, Guidance on the Accounting Standard for Business Combinations and name of company after business combination, and outline and pur- the Accounting Standard for Divestitures” (ASBJ Corporate Accounting pose of the transaction Standard Implementation Guidance No.10, amended on December 26, (1) Business subject to combination 2008). Name of combined business: Private equity investment business (partially) Description of business: Venture capital and buyout investment principally in unlisted companies

daiwa securities group annual report 2010 119 F i n a n c i a l S e c t i o n

Independent Auditors’ Report

To the Shareholders and the Board of Directors of Daiwa Securities Group Inc.:

We have audited the accompanying consolidated balance sheets of Daiwa Securities Group Inc. and consolidated subsidiaries as of March 31, 2010 and 2009, and the related consolidated statements of income, changes in net assets and cash flows for each of the three years in the period ended March 31, 2010, expressed in yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to independently express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Daiwa Securities Group Inc. and subsidiaries as of March 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2010, in conformity with accounting principles generally accepted in Japan.

Without qualifying our opinion, we draw attention to Note 27 to the consolidated financial statements, the Company, Sumitomo Mitsui Financial Group, Inc. and Sumitomo Mitsui Banking Corporation have reached an agreement on May 19, 2010 to terminate the joint venture contract regarding Daiwa SMBC Capital Co., Ltd.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2010 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.

Tokyo, Japan June 30, 2010

120 daiwa securities group annual report 2010 Other Information p122 Organization and Officers p128 Domestic Group Companies p129 Overseas Group Companies p131 Daiwa Securities Group Inc. Corporate Data

daiwa securities group annual report 2010 121 O t h e r I n f o r m at i o n Organization and Officers

Daiwa Securities Group Inc. 1) Organization (As of July 1, 2010)

Shareholders’ Meeting

Board of Directors Nominating Committee

Audit Committee Office of the Audit Committee

Compensation Committee

Executive Committee Internal Control Committee

Disclosure Committee

Group IT Strategy Committee

Representative Executive Officer Secretariat Office

Personnel Department

Corporate Planning Department

Legal Department

Corporate Communications Department

Investor Relations Department

Finance Department

Group Risk Management Department

Information Technology Department

General Affairs Department

CSR Promotion Department

Internal Audit Department

Mental Health Support Department

122 daiwa securities group annual report 2010 2) Officers(As of July 1, 2010)

Directors Committee Members Executive Officers

Chairman of the Board Nominating Committee President and CEO） Deputy President Akira Kiyota Akira Kiyota (Chairman) Shigeharu Suzuki Takashi Fukai Shigeharu Suzuki President, Daiwa Securities Co. Ltd. President, Daiwa Institute of Research Director Holdings Ltd. Tetsuro Kawakami President, Daiwa Institute of Research Ltd. Shigeharu Suzuki Deputy President and COO President, Daiwa Institute of Research Business Innovation Ltd. Ryuji Yasuda (Representative) Director Nobuko Matsubara Shin Yoshidome Shin Yoshidome Keiichi Tadaki President, Daiwa Securities Capital Corporate Executive Vice President Markets Co. Ltd. and CFO

Director Nobuyuki Iwamoto

Takashi Hibino Audit Committee Deputy President

Saburo Jifuku (Chairman) Takashi Hibino Corporate Executive Vice President Director Koichi Uno Deputy President, Daiwa Securities and CRO Makoto Shirakawa Capital Markets Co. Ltd. Takatoshi Wakabayashi Nobuko Matsubara Representative Senior Managing Director, Daiwa Securities Capital Markets Co. Ltd. Director Keiichi Tadaki Deputy President Nobuyuki Iwamoto Makoto Shirakawa Deputy President, Daiwa Securities Co. Ltd. Corporate Senior Executive Officer Compensation Committee Director and CIO Akira Kiyota (Chairman) Takatoshi Wakabayashi Kazuo Oda Deputy President Shigeharu Suzuki Managing Director, Daiwa Securities Capital Markets Co. Ltd. Director Masaki Shimazu Tetsuro Kawakami Senior Managing Director, Daiwa Institute Deputy President, Daiwa Securities Co. Ltd. of Research Ltd. Kazuo Oda Ryuji Yasuda Chairman of the Boad, Daiwa Securities SMBC Principal Investments Co. Ltd. Chairman of the Boad, Daiwa PI Partners Director Koichi Uno Co. Ltd. Corporate Executive Officer Saburo Jifuku Keiko Uehara

Deputy President Outside Director Tetsuro Kawakami Toshiro Ishibashi Corporate Executive Officer President, Daiwa Asset Management Toshihiro Matsui Co. Ltd. Outside Director Ryuji Yasuda Corporate Executive Officer Tetsuo Akuzawa Outside Director Koichi Uno Corporate Executive Officer Outside Director Akira Kiyota Nobuko Matsubara

Outside Director Keiichi Tadaki

daiwa securities group annual report 2010 123 O t h e r I n f o r m at i o n

Daiwa Securities Co. Ltd. 1) Organization (As of July 1, 2010)

Shareholders’ Meeting

Board of Directors Board of Corporate Auditors Corporate Auditors Corporate Auditors’ Office

Management Committee Legal Affairs & Compliance Committee Risk Management Committee Executive Committee

Internal Audit Officer Internal Audit Dept.

Risk Management Dept. Risk Management Officer Information Security Dept.

Corporate Planning Dept.

Planning & Personnel Officer Personnel Dept.

Education and Training Dept.

Accounting & Finance Dept. Administration Division [Head of Administration Division] LMS Management Dept. [Deputy Head of Administration Operations Dept. Division] Operations & System Planning Officer System Planning Dept.

Investment Program Officer Investment Program Dept.

Compliance Dept. Compliance Division Sales Inspection Dept. [Head of Compliance Division] Transaction Assessment Dept.

Products Planning Dept.

Investment Strategy & Research Dept.

Equity Dept.

Products Division Products Officer Fixed Income Dept. [Head of Products Division] Products Operations Dept.

Investment Trust Dept.

Pension & Annuity Dept.

Online Products and Services Officer Online Products and Services Dept.

Data Processing Dept.

Sales Planning Dept.

Sales Planning Officer Internal Wholesaler Dept.

Store Planning Dept.

Wealth Management Dept.

Corporate Client Support Dept.

Strategic Advisory Dept. (M&A) Sales Division [Head of Sales Division] Corporate Officer Corporate Pension Dept. [Deputy Head of Sales Division] Corporate Institutions Dept.

Financial & Public Institutions Dept.

Private Banking Officer Private Banking Dept.

Head Sales Office

Nagoya Branch Sales Officer Hiroshima Branch

Groups

Loan Business Officer Loan Business Dept.

Daiwa Direct Planning Dept. Daiwa Direct Division Daiwa Direct Division Officer Call Center Management Dept. [Head of Daiwa Direct Division] Daiwa Direct Administration Dept.

SMA Consulting Dept.

Daiwa SMA Division SMA Investment Management Dept. SMA Officer [Head of Daiwa SMA Division] SMA Operation & Examination Dept.

Fund Wrap Dept.

Overseas subsidiary

124 daiwa securities group annual report 2010 2) Officers(As of July 1, 2010)

Directors Corporate Auditors Executive Officers

President Zenichiro Onishi Senior Executive Officers Executive Officers Shigeharu Suzuki Keiji Komagata Koichi Matsushita Kentaro Ito Deputy President Keiichi Sakai Hiroyuki Kasahara Makoto Shirakawa Saburo Jifuku Naofumi Idei Junichi Okura Deputy President Masaki Shimazu Ikuo Shoda Junichi Aizawa

Senior Managing Director Yosuke Sakai Naoko Saito Yoriyuki Kusaki Kazuo Hayasaki

Managing Director Noriaki Kusaka Kenichi Miki Keiko Tashiro Representative Managing Director Osamu Abiru Fujio Yanagihara

Managing Director Tetsuya Kawaguchi Hiroshi Nakamura Shinji Kawakami Managing Director Shinya Kusaba Masahisa Nakagawa

Yasuji Karita

daiwa securities group annual report 2010 125 O t h e r I n f o r m at i o n

Daiwa Securities Capital Markets Co. Ltd. 1) Organization (As of July 1, 2010)

Shareholders’ Meeting

Board of Directors Board of Corporate Auditors Corporate Auditors Corporate Auditors’ Office

Management Committee Executive Committee

Legal Affairs & Compliance Committee Risk Management Committee

Internal Audit Officer

Global Equity Products Officer

Global Equity Sales Officer

Fixed Income, Currency and Commodities (FICC) Officer

Global Markets Trading Officer

Global Markets Administration Officer

Global Markets Planning Officer

Financial Research Center Officer

Syndicate Officer

Structured Finance Officer

Corporate Finance Officer

Strategic Advisory (M&A) Officer

Capital Markets Officer

Initial Public Offering Officer

Investment Programs Officer

Global Investment Banking Planning Officer

Corporate Division Planning Officer

Financial & Public Institutions Officer

Corporate Sales Officer

Corporate Institutions Officer

Osaka Branch Officer

Nagoya Branch Officer

Asia & Oceania Officer

Europe & Middle East Officer

Americas Officer

Compliance Officer

Risk Management Officer

Treasury Officer

IT & Operations Officer

Planning Officer

International Planning Officer

Head, Asia Strategic Planning

126 daiwa securities group annual report 2010 2) Officers(As of July 1, 2010)

Directors Corporate Auditors Executive Officers

President Shigeharu Tominaga Senior Executive Officers Executive Officers Shin Yoshidome Eishu Kosuge Yoshio Urata Satoshi Otsu Deputy President Yoshimasa Nagase Akihiko Kanamura Takashi Hibino Tatsuru Asano President, Daiwa Capital Markets Asia Holding B.V. Hiroaki Saito Chairman, Daiwa Capital Markets Hong Senior Managing Director Kong Limited Kazuo Takahashi Chairman, Daiwa-Cathay Capital Markets Akio Takahashi Co., Ltd.

Representative Senior Managing Masaaki Goto Yuichi Akai Director Chairman, Daiwa Capital Markets Chairman, Daiwa Capital Markets America Holdings Inc. Singapore Limited Takatoshi Wakabayashi Chairman, Daiwa Capital Markets Futures Keiichi Takezaki Pte Ltd. Senior Managing Director Deputy Chairman, Daiwa Capital Markets Hong Kong Limited Masami Tada Chairman, Daiwa Capital Markets Europe Limited Toshihiko Onishi

Managing Director Seiya Miyamoto Kazuo Oda Takeaki Mori

Managing Director Koichi Maruo Motoi Takahashi Kenji Kawamura Managing Director Toshinao Matsushima Tsuneo Hasegawa

Managing Director Takeshi Niikura Shinya Nishio Wilfried Schmidt Managing Director Deputy Chairman, Daiwa Capital Markets Seiji Nakata Europe Limited

Mikita Komatsu

Sumio Otsuka

daiwa securities group annual report 2010 127 Other Information Domestic Group Companies (As of July 1, 2010)

Daiwa Securities Co. Ltd. Daiwa PI Partners Co. Ltd. GranTokyo North Tower 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-6730, Japan 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-6752, Japan Tel: (81) 3-5555-6001 Tel: (81) 3-5555-2111 Daiwa Securities SMBC Principal Investments Co. Ltd. Daiwa Securities Capital Markets Co. Ltd. GranTokyo North Tower GranTokyo North Tower 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo, 100-6754, Japan 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-6753, Japan Tel: (81) 3-5555-6111 Tel: (81) 3-5555-3111 Daiwa Fund Consulting Co. Ltd. Daiwa Asset Management Co. Ltd. 6-1, Otemachi 2-chome, Chiyoda-ku, Tokyo 100-0004, Japan 10-5, Nihonbashi-Kayabacho 2-chome, Chuo-ku, Tokyo Tel: (81) 3-6225-3200 103-0025, Japan Tel: (81) 3-5695-2111 Daiwa Real Estate Asset Management Co. Ltd. 2-1, Ginza 6-chome, Chuo-ku, Tokyo 104-0061, Japan Daiwa Institute of Research Holdings Ltd. Tel: (81) 3-6215-9500 15-6, Fuyuki, Koto-ku, Tokyo 135-8460, Japan Tel: (81) 3-5620-5501 Daiwa Pension Consulting Co., Ltd. 3-2, Toyo 2-chome, Koto-ku, Tokyo 135-0016, Japan Daiwa Institute of Research Ltd. Tel: (81) 3-3615-7771 15-6, Fuyuki, Koto-ku, Tokyo 135-8460, Japan Tel: (81) 3-5620-5100 Daiwa Investor Relations Co. Ltd. 2-1, Kyobashi 1-chome, Chuo-ku, Tokyo 104-0031, Japan Daiwa SB Investments Ltd. Tel: (81) 3-5555-4111 2-1, Kasumigaseki 3-chome, Chiyoda-ku, Tokyo 100-0013, Japan Tel: (81) 3-6205-0200 Daiwa Securities Media Networks Co. Ltd. GranTokyo North Tower Daiwa Securities Business Center Co. Ltd. 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-6751, Japan 3-2, Toyo 2-chome, Koto-ku, Tokyo 135-0016, Japan Tel: (81) 3-5555-1175 Tel: (81) 3-5633-6100 Daiwa Sanko Co., Ltd. Daiwa Property Co., Ltd. 5-9, Sotokanda 2-chome, Chiyoda-ku, Tokyo 101-0021, Japan 2-1, Kyobashi 1-chome, Chuo-ku, Tokyo 104-0031, Japan Tel: (81) 3-5256-4111 Tel: (81) 3-5555-4700 HINODE SECURITIES CO., LTD. Daiwa Corporate Investment Co., Ltd. 2-14, Awajicho 2-chome, Chuo-ku, Osaka-shi, Osaka 541-0047, 8-10, Kudankita 1-chome, Chiyoda-ku, Tokyo 102-0073, Japan Japan Tel: (81) 3-6910-2600 Tel: (81) 6-6205-7711

Daiwa Institute of Research Business Innovation Ltd. DIR System Management Co., Ltd. 36-2 Hakozaki-cho, Nihonbashi, Chuo-ku, Tokyo 103-0015, Japan 14-6, Eitai 1-chome, Koto-ku, Tokyo 135-8461, Japan Tel: (81) 3-5931-8600 Tel: (81) 3-3820-3295

Daiwa Net Bank Preparatory Co., Ltd. DIR System Technology Co., Ltd. GranTokyo North Tower 14-5, Fuyuki, Koto-ku, Tokyo 135-0041, Japan 9-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-6756, Japan Tel: (81) 3-5621-4140 Tel: (81) 3-5555-6500

128 da i wa secu r it i e s grou p a n n ua l r eport 2010 Overseas Group Companies (As of July 1, 2010)

Daiwa Securities Group Inc.

Daiwa Securities Trust and Banking (Europe) PLC Daiwa Europe Fund Managers (Ireland) Ltd. 5 King William Street, London EC4N 7JB, United Kingdom Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland Tel: (44) 20-7320-8000 Tel: (353) 1-603-9900

Daiwa Securities Trust Company Daiwa Europe Trustees (Ireland) Ltd. One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland Tel: (1) 201-333-7300 Tel: (353) 1-603-9900

Daiwa Securities Capital Markets Co. Ltd.

Daiwa Capital Markets America Inc. New York Head Office Financial Square, 32 Old Slip, New York, NY 10005, U.S.A. Tel: (1) 212-612-7000

San Francisco Branch 555 California Street, Suite 3360, San Francisco, CA 94104, U.S.A. Tel: (1) 415-955-8100

Daiwa Capital Markets Europe Limited London Head Office Bahrain Branch 5 King William Street, London EC4N 7AX, United Kingdom 7th Floor, Bahrain World Trade Centre, South Tower Tel: (44) 20-7597-8000 P.O. Box 30069, Manama, Bahrain Tel: (973) 1753-4452 Frankfurt Branch Trianon Bldg., Mainzer Landstrasse 16, 60325 Frankfurt am Dubai Branch Main, Federal Republic of Germany The Gate Village Building 1, 1st Floor, Unit 6, Tel: (49) 69-717080 Dubai International Financial Centre, P.O. Box 506657, Dubai, UAE Tel: (971) 4-7090401 Paris Branch 127, Avenue des Champs-Elysées, 75008 Paris, France Moscow Representative Office Tel: (33) 1-56-26-22-00 25/9, Bldg. 1, Per. Sivtsev Vrazhek, Moscow 119002, Russian Federation Geneva Branch Tel: (7) 495-617-1960 50, rue du Rhône, P.O. Box 3198, 1211 Geneva 3, Switzerland Tel: (41) 22-818-74-00

Milan Branch Via Senato 14/16, 20121 Milan, Italy Tel: (39) 02-763271

daiwa securities group annual report 2010 129 O t h e r I n f o r m at i o n

Daiwa Capital Markets Hong Kong Limited Seoul Branch 26th Floor, One Pacific Place, 88 Queensway, Hong Kong 6th Floor, Hana Daetoo Securities Building, #27-3, Youido-dong, Tel: (852) 2525-0121 Yongdungpo-gu, Seoul, Republic of Korea Tel: (82) 2-787-9100 Daiwa Capital Markets Singapore Limited 6 Shenton Way #26-08, DBS Building Tower Two, Singapore Beijing Representative Office 068809, Republic of Singapore Room 3503/3504, SK Tower, No. 6 Jia Jianguomen Wai Avenue, Tel: (65) 6220-3666 Chaoyang District, Beijing, People’s Republic of China 100022 Tel: (86) 10-6500-6688 Daiwa Capital Markets Australia Limited Bangkok Representative Office 34th Floor, Rialto North Tower, 525 Collins Street, Melbourne, 18th Floor, M. Thai Tower, All Seasons Place, 87 Wireless Victoria 3000, Australia Road, Lumpini, Pathumwan, Bangkok 10330, Thailand Tel: (61) 3-9916-1300 Tel: (66) 2-252-5650 Daiwa Capital Markets India Private Limited Hanoi Representative Office 10th Floor, 3 North Avenue, Maker Maxity, Suite 405, Pacific Place Building, 83B Ly Thuong Kiet Street, Bandra Kurla Complex, Bandra East, Mumbai 400051, India Hanoi, Vietnam Tel: (91) 22-6622-1000 Tel: (84) 4-3-946-0460

DBP-Daiwa Capital Markets Philippines, Inc. 18th Floor, Citibank Tower, 8741 Paseo de Roxas, Salcedo Village, Makati City, Republic of the Philippines Tel: (632) 813-7344

Daiwa-Cathay Capital Markets Co., Ltd. 14th Floor, 200, Keelung Road, Sec.1, Taipei, Taiwan, R.O.C. Tel: (886) 2-2723-9698

Daiwa SSC Securities Co., Ltd. 45th Floor, HSBC Tower, 1000 Lujiazui Ring Road, Pudong, Shanghai, People’s Republic of China 200120 Tel: (86) 21-3858-2000

130 daiwa securities group annual report 2010 Daiwa Securities Group Inc. Corporate Data

Common Stock Issued and Outstanding 1,749,358 thousand shares (as of March 31, 2010)

Number of Shareholders 131,083 (as of March 31, 2010)

daiwa securities group annual report 2010 daiwa securities group annual report 2010 131 www.daiwa-grp.jp Annual Report 2010 Report Annual

Annual Report 2010 Year ended March 31, 2010

Printed in Japan