(b) Financial assets and liabilities held by the subsidiary that engages in the banking business 

The subsidiary that engages in the banking business regards the financial value changes as the market risk for its financial assets and liabilities, and utilizes it for the quantitative analysis when managing the interest rate risk. The financial value changes are derived from 99 percentile figure of the interest rate volatility measured with a holding period of one year and observation period of five years. 

Calculating the financial value changes, the financial assets and liabilities are categorized according to the interest due date and interest rate volatility is used for each term. At the end of the fiscal year, presuming that all the risk factors except interest rates are unchanged, the financial value derived from the 99th percentile figure will be decreased by 4.1 billion yen ($51 million). 

The financial value changes suppose that the risk factors except interest rates are unchanged, and it is not considered to be a correlation between the interest rates and other risk fac- tors. Therefore it is possible that the actual impact may exceed the calculated amount in the case that the interest rates fluctua- tion is not within the reasonably estimated range. 

(iii) Management of liquidity risk concerning raising capital Daiwa conducts its business with a core focus on the securities related business, utilizing a lot of assets and liabilities and establishes the basic policy which clarifies to efficiently secure enough liquidity for continuing its business. 

Methods of raising capital of Daiwa include unsecured fund- raising such as corporate bonds, medium-term notes, borrow- ing from financial institutions, commercial paper, call money, and deposits, etc. and secured fundraising such as Gensaki transactions and repurchase agreements, etc. By those meth- ods, Daiwa realizes effective and stable raising of capital. 

In terms of financial stability, preparing for the case that the environment vastly changes, Daiwa endeavors in ordinary times to secure a stable reserve to prevent the business from suffer- ing trouble. Especially in recent years, Daiwa has increased liquidity by raising capital raising from the market and borrowing from financial institutions, preparing for the world wide financial crisis and credit crunch. 

Also, Daiwa tries to diversify the maturity of raised capital and sources of funding preparing for the event that it becomes difficult to raise new capital and to reschedule the existing raising of capital due to a financial crisis occurring. 

Further, Daiwa has established a liquidity management system in accordance with liquidity coverage ratio suggested by Basel Committee on Banking Supervision. That means that Daiwa daily monitors if the liquidity portfolio, which should cover financing proceeds without collateral that has a maturity date 

within a certain period as well as the estimated cash outflow caused by realization of one of some stress scenarios prepared in advance during the same period, is maintained or not. Daiwa has established a system that enables Daiwa to continue the business even if Daiwa cannot raise funds for a year or so. 

The Company collectively manages and monitors the liquidity of Daiwa under the basic policy to secure the appropriate liquid- ity of Daiwa as a whole. The Company always monitors whether the liquidity portfolio is sufficiently secured against short-term raised capital without collateral preparing for the case that it becomes difficult to raise new capital and to reschedule the existing raising of capital due to the occurrence of some stress which is specific to the Company or influences the entire market. Also, Daiwa has established a system that enables the Company to flexibly supply capital to the group companies if necessary, and achieves efficient and unified raising of capital and capital management. That enables Daiwa to raise and manage capital integrally. 

Daiwa has also established a contingency plan as one of the measures of dealing with liquidity risk. This plan states basic policy concerning the report lines depending upon the urgency of stress internally originated including a credit crunch, and externally originated including an abrupt change of market environment, and the method of raising capital. The contin- gency plan enables Daiwa to prepare a system for securing liquidity through a swift response. 

The contingency plan of Daiwa was established considering the stress that the entire group may face and is periodically revised to quickly respond to changing financial environments. 

Moreover, Daiwa Securities, Daiwa Securities CM, Daiwa Next Bank, Ltd. and foreign securities subsidiaries, which are sensitive to influence by financial markets and for which the importance to secure liquidity of the capital is significant, each decide their own contingency plans and are periodically revising their plans as well. 

The Company periodically monitors the maintenance of its subsidiaries’ contingency plans. The Company revises, if neces- sary, the capital raising plan or contingency plan itself with crisis scenarios assumed and tries to preliminarily execute counter- measures, both increasing the liquidity and reducing assets at the same time. 

(iv) Supplementary explanation for the fair values of financial instruments 

The fair value of financial instruments includes the price based on market value and the theoretical price reasonably calculated in the case of no market value. They may be changed with different conditions because a certain condition is applied to calculating theoretical prices. 

