Securitizations and Variable Interest Entities

12 Months Ended

Mar. 31, 2013

Securitizations and Variable Interest Entities

8. Securitizations and Variable Interest Entities:

Securitizations

Nomura utilizes special purpose entities (“SPEs”) to securitize commercial and residential mortgage loans, government agency and corporate securities and other types of financial assets. Those SPEs are incorporated as stock companies, Tokumei kumiai (silent partnerships), Cayman special purpose companies (“SPCs”) or trust accounts. Nomura’s involvement with SPEs includes structuring SPEs, underwriting, distributing and selling debt instruments and beneficial interests issued by SPEs to investors. Nomura accounts for the transfer of financial assets in accordance with ASC 860. This statement requires that Nomura accounts for the transfer of financial assets as a sale when Nomura relinquishes control over the assets. ASC 860 deems control to be relinquished when the following conditions are met: (a) the assets have been isolated from the transferor (even in bankruptcy or other receivership), (b) the transferee has the right to pledge or exchange the assets received, or if the transferee is an entity whose sole purpose is to engage in securitization or asset-backed financing activities, the holders of its beneficial interests have the right to pledge or exchange the beneficial interests, and (c) the transferor has not maintained effective control over the transferred assets. Nomura may retain an interest in the financial assets, including residual interests in the SPEs. Any such interests are accounted for at fair value and reported within Trading assets in Nomura’s consolidated balance sheets, with the change in fair value reported within Revenue-Net gain on trading. Fair value for retained interests in securitized financial assets is determined by using observable prices; or in cases where observable prices are not available for certain retained interests, Nomura estimates fair value based on the present value of expected future cash flows using its best estimates of the key assumptions, including forecasted credit losses, prepayment rates, forward yield curves and discount rates commensurate with the risks involved. Nomura may also enter into derivative transactions in relation to the assets transferred to an SPE.

As noted above, Nomura may have continuing involvement with SPEs to which Nomura transferred assets. For the years ended March 31, 2012 and 2013, Nomura received cash proceeds from SPEs in new securitizations of ¥349 billion and ¥407 billion, respectively, and the amounts of associated profit on sale were not significant. For the years ended March 31, 2012 and 2013, Nomura received debt securities issued by these SPEs with an initial fair value of ¥1,336 billion and ¥1,783 billion, respectively, and cash inflows from third parties on the sale of those debt securities of ¥723 billion and ¥951 billion, respectively. The cumulative balance of financial assets transferred to SPEs with which Nomura has continuing involvement was ¥3,782 billion and ¥4,109 billion as of March 31, 2012 and 2013, respectively. Nomura’s retained interests were ¥165 billion and ¥300 billion as of March 31, 2012 and 2013, respectively. For the years ended March 31, 2012 and 2013, Nomura received cash flows of ¥14 billion and ¥26 billion, respectively, from the SPEs on the retained interests held in the SPEs. Nomura had outstanding collateral service agreements and written credit default swap agreements in the amount of ¥27 billion and ¥18 billion as of March 31, 2012 and 2013, respectively. Nomura does not provide financial support to SPEs beyond its contractual obligations.

The following tables present the fair value of retained interests where Nomura has continuing involvement in SPEs and their classification in the fair value hierarchy, categorized by the type of transferred assets.

	Billions of yen
	March 31, 2012
	Level 1		Level 2		Level 3		Total		Investment grade		Other
Government, agency and municipal securities	¥	—	¥	163	¥	—	¥	163	¥	161	¥	2
Bank and corporate debt securities		—		—		0		0		—		0
Mortgage and mortgage-backed securities		—		—		2		2		2		—
Total	¥	—	¥	163	¥	2	¥	165	¥	163	¥	2
	Billions of yen
	March 31, 2013
	Level 1		Level 2		Level 3		Total		Investment grade		Other
Government, agency and municipal securities	¥	—	¥	296	¥	—	¥	296	¥	296	¥	—
Bank and corporate debt securities		—		—		0		0		—		0
Mortgage and mortgage-backed securities		—		2		2		4		2		2
Total	¥	—	¥	298	¥	2	¥	300	¥	298	¥	2

The following table presents the key economic assumptions used to determine the fair value of the retained interests and the sensitivity of this fair value to immediate adverse changes of 10% and 20% in those assumptions.

	Billions of yen, except percentages
	Material retained interests held(1) as of March 31
	2012			2013
Fair value of retained interests(1)	¥	157		¥	288
Weighted-average life (Years)		7.0			6.0
Constant prepayment rate		8.1	%		10.1	%
Impact of 10% adverse change		(1.3	)		(2.6	)
Impact of 20% adverse change		(2.4	)		(5.0	)
Discount rate		3.3	%		3.6	%
Impact of 10% adverse change		(3.7	)		(4.2	)
Impact of 20% adverse change		(7.1	)		(8.2	)

(1) The sensitivity analysis covers the material retained interests held of ¥157 billion out of ¥165 billion as of March 31, 2012 and ¥288 billion out of ¥300 billion as of March 31, 2013. Nomura considers the amount or the probability of anticipated credit loss from the retained interests which Nomura continuously holds would be minimal.

Changes in fair value based on 10% or 20% adverse changes generally cannot be extrapolated since the relationship of the change in assumption to the change in fair value may not be linear. The impact of a change in a particular assumption is calculated holding all other assumptions constant. For this reason, concurrent changes in assumptions may magnify or counteract the sensitivities disclosed above. The sensitivity analyses are hypothetical and do not reflect Nomura’s risk management practices that may be undertaken under those stress scenarios.

The following table presents the type and carrying value of financial assets included within Trading assets which have been transferred to SPEs but which do not meet the criteria for derecognition under ASC 860. These transfers are accounted for as secured financing transactions and generally reported within Long-term borrowings. The assets are pledged as collateral of the associated liabilities and cannot be removed unilaterally by Nomura and the liabilities are non-recourse to Nomura.

	Billions of yen
	March 31
	2012		2013
Assets
Trading assets
Equities	¥	116	¥	72
Debt securities		84		86
Mortgage and mortgage-backed securities		27		24
Long-term loans receivable		21		8
Total	¥	248	¥	190
Liabilities
Long-term borrowings	¥	223	¥	177

Variable Interest Entities (“VIEs”)

In the normal course of business, Nomura acts as a transferor of financial assets to VIEs, and underwriter, distributor, and seller of repackaged financial instruments issued by VIEs in connection with its securitization and equity derivative activities. Nomura retains, purchases and sells variable interests in VIEs in connection with its market-making, investing and structuring activities. Nomura consolidates VIEs for which Nomura is the primary beneficiary, including those that were created to market structured securities to investors by repackaging corporate convertible securities, mortgages and mortgage-backed securities. Certain VIEs used in connection with Nomura’s aircraft leasing business as well as other purposes are consolidated. Nomura also consolidates certain investment funds, which are VIEs, and for which Nomura is the primary beneficiary.

The following table presents the classification of consolidated VIEs’ assets and liabilities in these consolidated financial statements. The assets of a consolidated VIE may only be used to settle obligations of that VIE. Creditors do not have any recourse to Nomura beyond the assets held in the VIEs.

	Billions of yen
	March 31
	2012			2013
Consolidated VIE assets
Cash and cash equivalents	¥	52		¥	13
Trading assets
Equities		730			353
Debt securities		180			200
Mortgage and mortgage-backed securities		84			138
Investment trust funds and other		0			—
Derivatives		4			3
Private equity investments		1			1
Securities purchased under agreements to resell		7			12
Office buildings, land, equipment and facilities		140	(2)		17
Other(1)		408	(2)		64
Total	¥	1,606		¥	801
Consolidated VIE liabilities
Trading liabilities
Debt securities	¥	4		¥	6
Derivatives		38			15
Securities sold under agreements to repurchase		0			4
Borrowings
Long-term borrowings		992			458
Other		35			7
Total	¥	1,069		¥	490

(1) Includes aircraft purchase deposits of ¥17 billion and ¥16 billion as of March 31, 2012 and 2013, respectively. In relation to these aircraft purchase deposits, certain of these SPEs have commitments to purchase aircraft. See Note 22 “Commitments, contingencies and guarantees” for further information.

(2) Includes real estate and real estate for sale held by SPEs related to a consolidated subsidiary. That subsidiary was de-consolidated during the year ended March 31, 2013.

Nomura also holds variable interests in VIEs where Nomura is not the primary beneficiary. Nomura’s variable interests in such VIEs include senior and subordinated debt, residual interests, and equity interests associated with commercial and residential mortgage-backed and other asset-backed securitizations and structured financings, equity interests in VIEs which were formed primarily to acquire high yield leveraged loans and other lower investment grade debt obligations, residual interests in operating leases for aircraft held by VIEs, and loans and investments in VIEs that acquire operating businesses.

The following tables present the carrying amount of variable interests of unconsolidated VIEs and maximum exposure to loss associated with these variable interests. Maximum exposure to loss does not reflect Nomura’s estimate of the actual losses that could result from adverse changes, nor does it reflect the economic hedges Nomura enters into to reduce its exposure. The risks associated with VIEs in which Nomura is involved are limited to the amount recorded in the consolidated balance sheets, the amount of commitments and financial guarantees and the notional amount of the derivative instruments. Nomura believes the notional amount of derivative instruments generally exceeds the amount of actual risk.

	Billions of yen
	March 31, 2012
	Carrying amount of variable interests				Maximum exposure to loss to unconsolidated VIEs
	Assets		Liabilities
Trading assets and liabilities
Equities	¥	58	¥	—	¥	58
Debt securities		133		—		133
Mortgage and mortgage-backed securities		2,137		—		2,137
Investment trust funds and other		96		—		96
Derivatives		0		9		27
Private equity investments		25		—		25
Loans
Short-term loans		2		—		2
Long-term loans		29		—		29
Other		5		—		5
Commitments to extend credit and other guarantees		—		—		19
Total	¥	2,485	¥	9	¥	2,531
	Billions of yen
	March 31, 2013
	Carrying amount of variable interests				Maximum exposure to loss to unconsolidated VIEs
	Assets		Liabilities
Trading assets and liabilities
Equities	¥	65	¥	—	¥	65
Debt securities		173		—		173
Mortgage and mortgage-backed securities		2,843		—		2,843
Investment trust funds and other		161		—		161
Derivatives		0		—		18
Private equity investments		28		—		28
Loans
Short-term loans		7		—		7
Long-term loans		82		—		82
Other		4		—		4
Commitments to extend credit and other guarantees		—		—		33
Total	¥	3,363	¥	—	¥	3,414