Nomura Bank (Luxembourg) S.A. Annual accounts, Directors Report and Report of the approved statutory auditor 31 March 2011

Transcription

1 Nomura Bank (Luxembourg) S.A. Annual accounts, Directors Report and Report of the approved statutory auditor 31 March 2011

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3 Table of contents Directors report 2 Independent auditor s report 5 Annual accounts - Statement of financial position Income statement 8 - Statement of comprehensive income 9 - Statement of changes in equity 10 - Statement of cash flows Notes to the annual accounts 13 65

4 Directors' Report Year ended 31st March 2011 The directors of Nomura Bank (Luxembourg) S.A. (the Bank, we, our, us ) are pleased to announce its financial results for the fiscal year ending 31 st March Throughout the fiscal year, we faced continuous challenges and opportunities but continued our ceaseless efforts to reduce operational errors and risks and achieved a remarkable development of our activities. As in previous years, the major part of our businesses has been promoted by the strong relationships with the Nomura group s global network, specifically in investment fund businesses mainly in Japan and it has relied on our capabilities and flexibil ity of the operations by 297 experienced professionals and staff members of the Bank. Throughout the year we had a stable increase of revenues generated by our funds custody and funds administration business and the revenues from treasury activities have also been improving over the period. The higher than expected revenues, combined with an adequate management of our expenses has enabled us to reach a record operating profit of the Bank. This was re-enforced by some non operating transactions related to the collection of results available for distribution from our two subsidiaries for 6m ( m). As a result of these activities and transactions, profit after tax for the fiscal year reached an amount of 37m ( m), our balance sheet as of 31 st March 2011 amounts to 6,890m (2010-5,146m) and shareholders equity amounts to 230m ( m). As of 31 st March 2011, the Bank has reached a total of $81bn Assets under Administration ( AuA ) ( $43bn), which represents a significant increase of 88% over the period. A split of these AuA into respective types of funds by instruments shows the trends of the year as follows: Bond funds: $52bn ( $22bn) Alternative funds: $3bn ( $3bn) Money market funds: $10bn ( $9bn) Equity funds: $14bn ( $6bn) Other funds: $2bn ( $3bn) We can also note that as of 31 st March 2011 Luxembourg funds represented $16bn ( $15bn) of the AuA while Cayman funds represented $65bn ( $28bn). As of 31 st March 2011, the Bank was servicing 424 funds and sub-funds ( ), 84 % of which are Cayman Islands funds. Strong performance of the year is first of all to be attributed to Nomura Securities Co., Ltd s ability to distribute multi dividend type investments funds (multi currency exposure combined with an investment into high yield bonds or high dividend equities) to retail investors in Japan. It is also the result of the Bank s achievement to carry out so called T+0 project. Facing a growing demand from the promoters, the main objective of T+0 project was to enable NAV calculations of funds using intraday or closing prices of the day for US and European securities. The implementation of the project required, amongst others, reorganization of end of day processes in IT area, enhancement of our pricing and exchange rates control tool, client reporting decoupling. Additional flexibility has been requested to the staff who started to work in shifts, with completion of the day-to-day operations around midnight. As a result, during the period, 24 new funds have been set-up under this new scheme with AuA above $27bn. In order to cope with continuous additional services requests from its clients and to offer the most appropriate legal structure for Cayman Islands investment trusts, the Bank is considering creating, within the next fiscal year, a so called controlled subsidiary. It will be a new company incorporated in the Cayman Islands and will be a wholly-owned subsidiary of Global Funds Trust Company ( GFTC ), one of the Bank s fully owned subsidiaries. As a subsidiary it will benefit from existing trust and mutual fund administrator licenses of its parent company. The controlled subsidiary will be mainly utilised as second trustee for master-feeder structures as well as management company for investment trusts set-up in the Cayman Islands under Retail Mutual Fund (Japan) Regulations for public distribution in Japan. The capital of the new company, to be financed by GFTC, is to be yet determined but will be subject to minimum requirements as defined by Japan Securities Dealers Association. The Bank has a constant focus on managing its business and associated risks appropriately. As in previous years, this resulted in constant search for improvement in processes, structure, tools, expertise and education. Accordingly, during the year closed on 31 st March 2011, significant investments 2

5 Directors Report (continued) have been made in training, application and system, research and analysis and improving processes. Those investment commitments are made for the long term and will continue over the next years. Significant examples of these investments are projects aiming to review and improve our reporting functions, increasing automation, changing our funds accounting application and platform, general trainings on anti-money laundering, participation to various seminars and conferences and analysis on processes or operating models performed with external experts. We have also continued recruiting experienced professionals. As of 31 st March 2011, the Bank employs 297 staff ( ). Another result of the growth coupled with the evolution of legal and business environment was the increasing importance of proper monitoring of capital and liquidity (solvency, liquidity, large exposure, connectivity, allocated capital or funding). In particular, the development of specific European Central Bank business for the liquidity management of other Group s entities resulted in clear focus on large exposure monitoring and specific netting agreements and collateral usage, in line with the Banque Centrale de Luxembourg ( BCL ) and the Commission de Surveillance du Secteur Financier ( CSSF ) recommendations and instructions. The year closed on 31 st March 2011 has been important for the Bank s Banking Business, which on one hand continued its expansion started the year before and on the other hand faced new regulatory environment. The continued flow of new funds becoming more and more attractive for Japanese final investors has led asset under custody to reach the Bank s record high for several consecutive months. The direct impact was an increase of the Bank s balance sheet and therefore cash under management as well as an increase of off balance sheet items due to the investment policy of underlying clients which is largely based on currency overlay. At the same time, regulators aiming to create a safer financial environment post-crisis, enhanced control and management by strengthening rules, more particularly regarding liquidity and credit. The Bank had to face this double challenge of adapting operations to absorb volume and enhancing strategies to comply with the new regulatory requirements. Liquidity management enhancement as well as new large exposures regime, led the Bank to increase counterparties diversification, to secure its activity using reverse repo on money market and implementing collateral requirement through use of so-called Credit Support Annex ( CSA ) or pledge agreement in the scope of foreign exchange business. Meanwhile, additional monitoring and assessment have been performed and more efficient risk mitigation techniques have been set, such as netting agreement and use of comprehensive approach to obtain a positive impact from collateral. All the year long, the Bank communicated closely with CSSF and BCL in order to follow up on the Bank s business and development and maintain regulatory ratios at comfortable level retaining room for further growth. Those topics have been on the agenda of all the Bank s risk management committee ( NBLRMC ) monthly meetings and important decisions and actions were taken to ensure that agreed or compulsory ratios would be permanently respected for the short and long terms. To improve the coverage of its disaster recovery plan, the Bank decided in 2009 to move its disaster recovery site ( DRS ) from the city of Luxembourg to the south of the country. This move increased the distance between the two sites (now about 18 km), and the Bank extends its current contract to add more working positions at the DRS. This change also allows the Bank to increase the capacity of its datacenter on the DRS. The site which hosts the Bank datacenter is certified Tier IV. This relocation project has been completed and fully tested in December The NBLRMC has regularly questioned about adequacy of its role and the risks management functions within the Bank. In the NBLRMC s report for year closed 31 st March 2010, it was anticipated that the Bank might have to review its approach towards risk management because of its growth, the changes in the environment and the increasing complexity and challenges of proper risk management. During the year under review, specific analyses were performed and we saw again changes in risk understanding and regulatory requirements. Accordingly, it was concluded that the Bank had reached the critical path to set-up a fully fledged risk management function. This led to a recruitment campaign for a dedicated chief risk officer ( CRO ) that was recently positively concluded. Over the year to come, several existing risk management functions will be reviewed and organized in a common structure under the responsibility of the CRO who will report directly to the 3

6 Directors' Report (continued) Bank s President & Managing Director. New risk management functions, if required, will derive from a review of the entire scope of the Bank s risk management, potentially covering areas which are currently not performed by the Bank. Adequate resourcing and tools will be put in place or reinforced, where necessary. Regular specific risk management/monitoring meetings will be organized with the CRO and the Bank s ExCom (executive committee). We strongly believe that the accuracy, the flexibility and errorfree operation is the key of our successful business and the management is always committed to improve the quality of services and capacity with further investments in systems and tools, improved processes as well as education and training of the staff members in order to reduce operational risks with careful cost monitoring. We continue to develop a risk management approach and culture considering numerous aspects of risks within our business segment and the specificities of our organization. Because of the nature of our business with main focus on fund administration, custody and agency, it is our policy not to take any significant market risks in foreign exchange, interest rate and other market prices. It is also our policy to closely monitor credit risks of our counterparties with the support of the specialists in Nomura group in London. internal audit, and risk management and control activities managed by the dedicated professional staff with the help of Nomura group s network. The Bank has no activities in research and development and has not bought its own shares during the year. There are no post balance sheet events to report that would affect the financial results for the year ending 31 st March 2011 or that would require a disclosure in the notes to the annual accounts. 1 st June 2011 Masafumi NAKADA Chairman Nomura Bank (Luxembourg) S.A Hajime USUKI President & Managing Director Nomura Bank (Luxembourg) S.A. The Bank has assessed and quantified its current and expected risks over a 3 years period by considering the activities of its various business lines. The analysis considered several types of risks (operational risk, market risk, credit risk, liquidity risk, business risk and specific risks related to the management activities of its subsidiaries). As a result of the analysis conducted, and considering all the risks the Bank faces, we concluded that the Bank is adequately capitalized. In order to reinforce its corporate governance by separating responsibilities for strategical decision making process and day to day management, it is anticipated that there will be changes in the composition of the Board of Directors by increasing the number of non-executive Directors and decreasing the number of Directors being also members of the Executive Committee. In order to mitigate the inherent risks associated with our business, we will continue to place emphasis on compliance, 4

7 Independent auditor s report 31st March 2011 To the Board of Directors of Nomura Bank (Luxembourg) S.A. Société Anonyme 33, rue de Gasperich L-5826 Hesperange Report on the annual accounts Following our appointment by the Board of Directors dated 4 June 2010, we have audited the accompanying annual accounts of Nomura Bank (Luxembourg) S.A., which comprise the statement of financial position as at 31 March 2011, the income statement, the statement of comprehensive income, the statement of changes in equity, the statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Board of Directors responsibility for the annual accounts The Board of Directors is responsible for the preparation and fair presentation of these annual accounts in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as the Board of Directors determines is necessary to enable the preparation and presentation of annual accounts that are free from material misstatement, whether due to fraud or error. accounts, whether due to fraud or error. In making those risk assessments, the réviseur d entreprises agréé considers internal control relevant to the entity s preparation and fair presentation of the annual accounts in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the annual accounts. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the annual accounts give a true and fair view of the financial position of Nomura Bank (Luxembourg) S.A. as of 31 March 2011, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. Report on other legal and regulatory requirements The management report, which is the responsibility of the Board of Directors, is consistent with the annual accounts. Responsibility of the réviseur d entreprises agréé Our responsibility is to express an opinion on these annual accounts based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the annual accounts are free from material misstatement. ERNST & YOUNG Société Anonyme Cabinet de révision agréé Sylvie TESTA Luxembourg, 1 June 2011 An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the annual accounts. The procedures selected depend on the judgement of the réviseur d entreprises agréé, including the assessment of the risks of material misstatement of the annual 5

8 Statement of financial position As of 31 March 2011 (expressed in EUR) Assets Notes 31 March March 2010 Cash and balances with central banks 4, 31, Derivatives held for trading 5, 31, 32, Available-for-sale equity instruments 6, 31, 32, Loans and advances 7, 29, 31, 32, Loans and advances to credit institutions Loans and advances to customers Tangible assets 8, Intangible assets 8, Deferred tax assets 14, Other assets 9, Total Assets The accompanying notes form an integral part of these annual accounts. 6

9 Liabilities and shareholders equity Liabilities Notes 31 March March 2010 Deposits from central banks 31, Derivatives held for trading 10, 31, 32, Financial liabilities designated at fair value through profit or loss 13, 31, Financial liabilities measured at amortised cost 31, 32, Amounts due to credit institutions Amounts due to customers Tax liabilities 14, Current tax liabilities Deferred tax liabilities Other liabilities 15, Total liabilities Shareholders equity Issued capital Reserves (including retained earnings) Available-for-sale reserve Profit for the year Total shareholders equity Total liabilities and shareholders equity The accompanying notes form an integral part of these annual accounts. 7

10 Income statement For the year ended 31 March 2011 (expressed in EUR) Notes 31 March March 2010 Net interest income Interest and similar income Interest and similar expenses 20 ( ) ( ) Dividend income 21, Net fee and commission income 22, Fee and commission income Fee and commission expenses (75.503) (89.776) Net realised gains (losses) on financial assets and liabilities not designated at fair value through profit or loss Net (un) realised gains (losses) on financial assets and liabilities held for trading Net (un) realised gains (losses) on financial assets and liabilities designated at fair value through profit or loss 23, ( ) Foreign exchange differences ( ) Net other operating income/expenses ( ) Other operating income Other operating expenses ( ) ( ) Administrative expenses 26, 29, 30, 34, 35 ( ) ( ) Depreciation and amortization ( ) ( ) Tangible assets 8, 27 ( ) ( ) Intangible assets 8, 27 ( ) ( ) Profit before tax Income tax expenses 14 ( ) ( ) Profit for the year The accompanying notes form an integral part of these annual accounts. 8

11 Statement of comprehensive income For the year ended 31 March 2011 (expressed in EUR) 31 March March 2010 Profit for the year Other comprehensive income Net gains (losses) on available-for-sale financial assets ( ) Income tax relating to components of other comprehensive income (2.205) Other comprehensive income for the year, net of tax ( ) Total comprehensive income for the year, net of tax The accompanying notes form an integral part of these annual accounts. 9

12 Statement of changes in equity For the year ended 31 March 2011 (expressed in EUR) Balance at 31 March 2010 Transfers and allocation of the prior year s profit Total comprehensive income Balance at 31 March 2011 Issued capital Profit brought forward FTA Reserve Reserves: a) Legal reserve (1) b) Special reserves (2) Revaluation reserve on AFS Profit for the year ( ) Shareholders equity Balance at 31 March 2009 Transfers and allocation of the prior year s profit total comprehensive income Balance at 31 March 2010 Issued capital Profit brought forward FTA Reserve Reserves: a) Legal reserve (1) b) Special reserves (2) Revaluation reserve on AFS ( ) Profit for the year ( ) Shareholders equity (1) Legal reserve recorded under Luxembourg law (see Note 17) (2) Reserves linked to exoneration of Net Wealth Tax charge subject to conditions (see Note 17) The accompanying notes form an integral part of these annual accounts. 10

13 Statement of cash flows For the year ended 31 March 2011 (expressed in EUR) 31 March March 2010 Profit before tax Adjustments: Depreciation / amortisation Fair value adjustments ( ) Cash flows from operating profits before changes in operating assets and liabilities Net (increase)/decrease in loans and advances to credit institutions ( ) Net (increase)/decrease in loans and advances to customers ( ) ( ) Net (increase)/decrease in available-for-sale financial assets Net (increase)/decrease in other assets ( ) Net increase/(decrease) in deposits from banks ( ) Net (increase)/decrease in deposits from customers ( ) Net increase/(decrease) in financial liabilities designated at fair value through profit or loss ( ) Net increase/(decrease) in other liabilities ( ) Income tax ( ) ( ) Net variations in other operating assets/liabilities Net cash flow from operating activities ( ) Acquisition of investment securities Acquisition of intangible/ tangible assets ( ) ( ) Proceeds from purchase or sale financial assets held-to-maturity Net cash flow from investing activities ( ) ( ) Net increase/decrease in cash and cash equivalents ( ) Cash and cash equivalents at beginning of year Net increase/decrease in cash and cash equivalents ( ) Cash and cash equivalents at end of year of which : not available The accompanying notes form an integral part of these annual accounts. 11

14 Statement of cash flows (continued) For the year ended 31 March 2011 (expressed in EUR) For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition: 31 March March 2010 Cash and balances with central banks (Note 4) Loans and advances to credit institutions repayable with less than three months maturity from the date of acquisition Cash and cash equivalents The accompanying notes form an integral part of these annual accounts. 12

15 Notes to the annual accounts As of 31 March 2011 Note 1 - Corporate information Note 2 - Significant accounting policies Corporate matters Nomura Bank (Luxembourg) S.A. (the Bank or NBL ) was incorporated in Luxembourg on 2 February 1990 as a Société Anonyme. Most members of the Board of Directors are Senior Executives of the Bank and its subsidiaries including the Managing Director. Nature of the Bank's business The object of the Bank is to undertake all banking, financial securities and fiduciary operations and to engage in leasing and factoring activities for its own account or for account of its customers. The Bank can establish or take part in finance and other companies or acquire, encumber or dispose of real estate for its own or for account of its customers. A significant volume of the Bank s transactions is concluded directly with companies of the Nomura Group or with their Japanese clients. Annual accounts The Bank s accounting year ends on 31 March of each year. Parent undertaking The Bank is a subsidiary of Nomura Europe Holdings Plc (the Parent company ), a holding company incorporated under the laws of United Kingdom and whose registered office is in London. The consolidated accounts of Nomura Europe Holdings Plc may be obtained from Nomura House, 1st. Martin s-le-grand, London, EC1A, 4NP, UK.* The Bank s ultimate parent is Nomura Holdings, Inc., a holding company incorporated under the laws of Japan whose registered office is in Tokyo. The consolidated accounts of Nomura Holdings, Inc. may be obtained at 1-9-1, Nihonbashi, Chuoku, Tokyo , Japan. Note Basis of preparation The annual accounts are prepared on the historical cost basis except for derivatives held for trading, available-for-sale equity instruments and debt certificates designated at fair value through profit or loss which are measured at fair value. Statement of compliance The annual accounts have been prepared in accordance with Inter national Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and the relative interpre tations of the International Financial Reporting Interpretations Committee (IFRIC) as adopted for use in the European Union (IFRS). The preparation of annual accounts in accordance with IFRS requires the Board of Directors to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expense items. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Judgments made by the Board of Directors in the application of IFRS that have significant effect on the annual accounts and estimates with a significant risk of material adjustments in the next year are developed in Note 3. As at 31 March 2011, the Bank presented for the first time in its annual accounts the effects of several standards, amendments to standards and IFRIC. Those newly applicable requirements have had no significant impact on the financial position and performance of the Bank. * Moved to: 1 Angel Lane, London, EC4R 3AB, United Kingdom on 1 st of June

16 Notes to the annual accounts (continued) As of 31 March 2011 Note 2 - Significant accounting policies (continued) The main new requirements encompass the following areas (only the requirements that impacted or could have impacted the annual accounts of the Bank are reported below): IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. Improvements to IFRSs In April 2009, the IASB issued omnibus of amendments to its standards, primarily with a view to removing inconsistencies and clarifying wording. There are separate transitional provisions for each standard. IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale of discontinued operations are only those set out in IFRS 5. The disclosure requirements of other IFRSs only apply if specifically required for such non-current assets or discontinued operations. IAS 7 Statement of Cash Flows: states that only expenditure that results in recognising an asset can be classified as a cash flow investing activity. The Bank has decided not to early adopt the following standards, amendments and interpretations, which have been issued but that are not yet applicable for the annual accounts as at 31 March Only standards, amendments and interpretations that may impact the Bank have been disclosed below: IAS 24 Related Party Disclosures (Amended) The amended standard is effective for annual periods beginning on or after 1 January It clarifies the definition of a related party to simplify the identification of such relationship and to eliminate inconsistencies in its application. IAS 32 Financial Instruments: Presentation Classification of Rights Issues (Amendment) The amendment to IAS 32 is effective for annual periods beginning on or after 1 February It amends the definition of a financial liability in order to classify rights issues (and certain options or warrants) as equity instruments in cases where such rights are given prorata to all of the existing owners of the same class of an entity s non-derivative equity instruments, or to acquire a fixed number of the entity s own equity instruments for a fixed amount in any currency. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments IFRIC 19 is effective for annual periods beginning on or after 1 July The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognised immediately in the income statement. Improvements to IFRSs Amendment to IFRS 7 Financial Instruments Disclosures: the amendment emphasises the interaction between quantitative and qualitative disclosures and the nature and extent of risks associated with financial instruments. Amendment to IAS 1 Presentation of Financial Statements: the amendment clarifies that an equity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. IFRS 9 Financial Instruments This is the first step in a three part project by the IASB to replace IAS 39 Financial Instruments. This first part, dealing with the classification and measurement of financial assets, simplifies the recognition of financial assets by requiring such assets to be measured at either amortised cost or fair value, depending on certain criteria. The standard is effective for financial years beginning on or after 1 January 2013, although it may be early adopted. The date of the 14

17 Note 2 - Significant accounting policies (continued) adoption of this standard by the Bank will also be dependent on the timing of the European Union endorsement process. The annual accounts were authorized for issue by the Bank s Board of Directors on 1 June Exemption from preparing consolidated accounts These annual accounts are prepared on a stand-alone basis. According to the current Luxembourg regulation, the Bank is exempt from the requirement to publish consolidated accounts and a consolidated management report. The exemption from preparing consolidated accounts in accordance with IFRS is based on the Accounting Regulatory Committee s paper (ARC/06/2007) which confirmed that where, under the 7th Company Law Directive, a parent company is exempted from preparing consolidated accounts, but chooses or is required to prepare its annual accounts in accordance with IFRS as adopted by the European Union, the provisions in IAS 27 setting out the requirement to prepare consolidated accounts do not apply. Note Summary of significant accounting policies (a) Foreign currency translation The annual accounts are presented in Euro ( EUR ), which is also the Bank s functional currency. Transactions in foreign currencies are initially recorded at the functional currency rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange at the statement of financial position date. All differences arising on non-trading activities are taken to Foreign exchange differences in the income statement. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. (b) Financial instruments initial recognition and subsequent measurement (i) Date of recognition All financial assets and liabilities are initially recognised on the value date. This includes purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace. (ii) Initial measurement of financial instruments The classification of financial instruments at initial recognition depends on the purpose and the management s intention for which the financial instruments were acquired and their characteristics. All financial instruments are measured initially at their fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. (iii) Derivatives held for trading Derivatives held for trading are recorded in the statement of financial position at fair value. Changes in fair value are recognised in Net (un) realised gains (losses) on financial assets and liabilities held for trading. Interest income or expense is recorded in Net interest income according to the terms of the contract, or when the right to the payment has been established. (iv) Derivative held for hedging The Bank may use derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities. Where there is a hedging relationship between a derivative instrument and a related item being hedged, the hedging instrument is measured at fair value. The treatment of any resulting gains and losses is set out below. A hedging relationship exists when: At the inception of the hedge there is formal documentation of the hedge; 15

18 Notes to the annual accounts (continued) As of 31 March 2011 Note 2 - Significant accounting policies (continued) The hedge is expected to be highly effective throughout the period and prospectively; The effectiveness of the hedge can be reliably measured; For hedges of a forecasted transaction, the transaction is highly probable and presents an exposure to variations in cash flows that could ultimately affect net profit or loss. For the purpose of hedge accounting, the Bank has classified hedges as fair value hedges and cash flow hedges. Fair value hedges The change in the fair value of a hedging derivative is recognised in the income statement. The change in the fair value of the hedged item attributable to the risk hedged is recorded as a part of the carrying value of the hedged item and is also recognised in the income statement. For fair value hedges relating to items carried at amortised cost, the adjustment to carrying value is amortised through the income statement over the remaining term to maturity. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest rate method is used, is amortised through the income statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised, the unamortised fair value is recognised immediately in the income statement. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in the income statement. The changes in the fair value of the hedging instrument are also recognised in the income statement. As at 31 March 2011 and 2010, the Bank has no fair value hedged transactions. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. Where the hedged item is the cost of a non financial asset or non financial liability, the amounts taken to equity are transferred to the initial carrying amount of the non financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction or firm commitment occurs. As at 31 March 2011 and 2010, the Bank has no cash flow hedged transactions. (v) Financial liabilities designated at fair value through profit or loss Financial liabilities classified in this category are those that have been designated by management on initial recognition. Management may only designate an instrument at fair value through profit or loss upon initial recognition when the following criteria are met, and designation is determined on an instrument by instrument basis: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the liabilities or recognising gains or losses on them on a different basis; or The liabilities are part of a group of financial liabilities which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains one or more embedded derivatives which significantly modify the cash flows that otherwise would be required by the contract. 16

19 Note 2 - Significant accounting policies (continued) Financial liabilities at fair value through profit or loss are recorded in the statement of financial position at fair value. Changes in fair value are recorded in Net (un) realised gains (losses) on financial assets and liabilities designated at fair value through profit or loss in the income statement. As at 31 March 2011 and 2010, included in this category are structured medium term notes issued by the Bank which contains embedded derivatives not separately recorded as permitted by IAS A. These financial instruments are not listed in an active market (see Note 13). (vi) Available-for-sale financial instruments Equity instruments classified as available-for-sale are those which are neither classified as held for trading nor designated at fair value through profit or loss. Available-for-sale-equity instruments include non quoted investments in subsidiaries. The Bank has not designated any loans or receivables or debt securities as available-for-sale. After initial measurement, available-for-sale equity instruments are subsequently measured at fair value. Unrealised gains and losses are recognised directly in equity in the Available-for-sale reserve. When the equity instrument is disposed of, the cumulative gain or loss previously recognised in equity is recognised in the income statement in Net realised gains (losses) on financial assets and liabilities not designated at fair value through profit or loss. Where the Bank holds more than one investment in the same security they are deemed to be disposed of on a first-in first-out basis. Dividends earned whilst holding available-for sale equity instruments are recognised in the income statement as Dividend income when the right of the payment has been established. The losses arising from impairment of such investments are recognised in the income statement in Impairment losses on financial investments and removed from the Available-for-sale reserve. (vii) Loans and advances Loans and advances include non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than: Those that the Bank intends to sell immediately or in the near term and those that the Bank upon initial recognition designates at fair value through profit or loss; Those that the Bank, upon initial recognition, designates as available-for-sale financial instruments; or Those for which the Bank may not recover substantially all of its initial investment, other than because of credit deterioration. After initial measurement, Loans and advances are subsequently measured at amortised cost using the effective interest rate ( EIR ), less allowance for impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortisation is included in Interest and similar income in the income statement. The losses arising from impairment are recognised in the income statement. (c) Derecognition of financial assets and financial liabilities (i) Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: The rights to receive cash flows from the asset have expired; or The Bank has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a pass-through arrangement; and either: The Bank has transferred substantially all the risks and rewards of the asset, or The Bank has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Bank has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Bank s continuing involvement in the asset. In that case, the Bank also recognises an associated liability. The transferred asset and the 17

20 Notes to the annual accounts (continued) As of 31 March 2011 Note 2 - Significant accounting policies (continued) associated liability are measured on a basis that reflects the rights and obligations that the Bank has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Bank could be required to repay. (ii) Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. (d) Reverse repurchase agreements Securities purchased under agreements to resell at a specified future date are not recognised in the statement of financial position. The consideration paid, including accrued interest, is recorded in the statement of financial position reflecting the transaction s economic substance as a loan by the Bank. The difference between the purchase and resale prices is recorded in Net interest income and is accrued over the life of the agreement using the EIR. (e) Determination of fair value The fair value for financial instruments traded in active markets is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. For all other financial instruments not traded in an active market, the fair value is determined by using appropriate valuation techniques. Valuation techniques include the discounted cash flow method, comparison to similar instruments for which market observable prices exist, options pricing models, credit models and other relevant valuation models. Certain financial instruments are recorded at fair value using valuation techniques in which current market transactions or observable market data are not available. Their fair value is determined using a valuation model that has been tested against prices or inputs to actual market transactions and using the Bank s best estimate of the most appropriate model assumptions. Models are adjusted to reflect the spread for bid and ask prices to reflect costs to close out positions, counterparty credit and liquidity spread and limitations in the models. Also, profit or loss calculated when such financial instruments are first recorded ( Day 1 profit or loss) is deferred and recognised only when the inputs become observable or on derecognition of the instrument An analysis of fair values of financial instruments and further details as to how they are measured are provided in Note 32. (f) Impairment of financial assets The Bank assesses at each statement of financial position date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, the probability that they will enter bankruptcy or other financial reorganisation, default or delinquency in interest or principal payments and where observable data indicates that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. (i) Financial assets carried at amortised cost For financial assets carried at amortised cost, the Bank first assesses individually whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Bank determines that no objective 18

21 Note 2 - Significant accounting policies (continued) evidence of impairment exists for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of Interest and similar income. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Bank. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to the income statement. The present value of the estimated future cash flows is discounted at the financial asset s original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR. The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of the Bank s internal credit grading assessment. Future cash flows on a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience, if any, is adjusted on the basis of current observable data to reflect the effects of current conditions on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with, changes in related observable data from year to year (such as changes in unemployment rates, property prices, commodity prices, payment status, or other factors that are indicative of incurred losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. As at 31 March 2011 and 2010, no impairment losses on financial assets carried at amortised cost have been recorded by the Bank. (ii) Available-for-sale financial instruments For available-for-sale financial instruments, the Bank assess at each statement of financial position date whether there is objective evidence that an investment is impaired. In the case of debt instruments classified as available-forsale, the Bank assesses individually whether there is objective evidence of impairment based on the same criteria as financial assets carried at amortised cost. However, the amount recorded for impairment is the cumulative loss measured as the difference between the amortised cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement. Future interest income is based on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of Interest and similar income. If, in a subsequent period, the fair value of a debt instrument increases and the increase can be objectively related to credit event occurring after the impairment loss was recognised in the income statement, the impairment loss is reversed through the income statement. 19

22 Notes to the annual accounts (continued) As of 31 March 2011 Note 2 - Significant accounting policies (continued) In the case of equity investments classified as available-forsale, objective evidence would also include a significant or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that investment previously recognised in the income statement is reclassified from equity to income statement as a reclassification adjustment. Impairment losses on equity investments are not reversed through the income statement; increases in the fair value after impairment are recognised directly in equity. As of 31 March 2011 and 2010, the Bank has not recorded any impairment on available-for-sale financial instruments. (g) Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross in the statement of financial position. (h) Recognition of income and expenses Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: (i) Interest and similar income and expenses For all financial instruments measured at amortised cost and financial instruments designated at fair value through profit or loss, interest income or expense is recorded using the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options) and includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The carrying amount of the financial asset or financial liability is adjusted if the Bank revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original EIR and the change in carrying amount is recorded as Other operating income. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognised using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (ii) Fee and commission income The Bank earns fee and commission income from a diverse range of services it provides to its customers. Fee income has to be divided into the following two categories: Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include commission income and asset management, custody and other management and advisory fees. Loan commitment fees for loans that are likely to be drawn down and other credit related fees, if any, are deferred (together with any incremental costs) and recognised as an adjustment to the EIR on the loan. When it is unlikely that a loan be drawn down, the loan commitment fees are recognised over the commitment period on a straight line basis. Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses, if any, are recognised on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognised after fulfilling the corresponding criteria. 20

23 Note 2 - Significant accounting policies (continued) (iii) Dividend income Dividend income is recognised when the Bank s right to receive the payment is established. (i) Cash and cash equivalents Cash and cash equivalents as referred to in the statement of cash flows comprises cash on hand, non-restricted current accounts with central banks and amounts due from banks on demand or with an original maturity of three months or less. (j) Tangible assets Tangible assets are stated at cost excluding the costs of day-today servicing, less accumulated depreciation and accumulated impairment in value. Changes in the expected useful life are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. Depreciation is calculated using the straight-line method to write down the cost of tangible assets to their residual values over their estimated useful lives. Land is not depreciated. The estimated useful lives are as follows: Computer hardware: 3 to 5 years; Other fixtures and fittings, tools and equipment: 5 years. Tangible assets are derecognised on disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognised in Other operating income/ expenses in the income statement in the year the asset is derecognised. (k) Intangible assets The Bank s intangible assets include the value of computer software and licenses. An intangible asset is recognised only when its cost can be measured reliably and it is probable that the expected future economic benefits that are attributable to it will flow to the Bank. Intangible assets acquired separately are measured on initial recognition at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Amortisation is calculated using the straight-line method to write down the cost of intangible assets to their residual values over their estimated useful lives as follows: Computer software and licenses: 3 to 5 years. (l) Impairment of non-financial assets The carrying amounts of the Bank s assets, except deferred income tax assets and financial assets, are reviewed at each statement of financial position date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. An impairment loss is recognised whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognised in the income statement. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. As of 31 March 2011 and 2010, the Bank has not booked any impairment on non-financial assets. 21

24 Notes to the annual accounts (continued) As of 31 March 2011 Note 2 - Significant accounting policies (continued) (m) Financial guarantees In the ordinary course of business, the Bank gives financial guarantees, consisting of letters of credit, guarantees and acceptances. Financial guarantees are initially recognised in the financial statements (within Other liabilities ) at fair value, being the premium received. Subsequent to initial recognition, the Bank s liability under each guarantee is measured at the higher of the amount initially recognised less, when appropriate, cumulative amortisation recognised in the income statement, and the best estimate of expenditure required to settle any financial obligation arising as a result of the guarantee. Any increase in the liability relating to financial guarantees is recorded in the income statement. The premium received is recognised in the income statement in Net fee and commission income on a straight line basis over the life of the guarantee. (n) Pension benefits The Bank operates a defined contribution pension plan. The contribution payable to a defined contribution plan is in proportion to the annual gross salary of the concerned employees and is recorded as an expense under Administrative expenses. Unpaid contributions are recorded as a liability. (o) Provisions Provisions are recognised when the Bank has a present obligation (legal or constructive) as a result of a past event, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to any provision is presented in the income statement net of any reimbursement. (p) Taxes Income tax on the income statement for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. (i) Current income tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the statement of financial position date. (ii) Deferred tax Deferred income tax is provided using the liability method, on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognised for all taxable temporary differences, except: Where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and In respect of taxable temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profits will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised except: Where the deferred income tax asset relating to the deductible temporary differences arises from the initial recognition of an asset or liability in a transaction that is not a business combination and at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and In respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences 22

25 Note 2 - Significant accounting policies (continued) will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. (q) Reclassifications of prior year figures Where necessary, certain prior year figures have been reclassified to conform with changes to the current year s presentation for comparative purpose. Note 3 - Significant accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Bank makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Going concern The Bank s Board of Directors has made an assessment of the Bank s ability to continue as a going concern and is satisfied that the Bank has the resources to continue in business for the foreseeable future. Furthermore, the Board of Directors is not aware of any material uncertainties that may cast significant doubt upon the Bank s ability to continue as a going concern. Therefore, the annual accounts continue to be prepared on the going concern basis. (b) Estimation of fair values of financial instruments The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the table. (i) Securities The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Bank establishes fair value by using valuation techniques. These include the use of recent arm s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. (ii) Derivatives The fair value of derivatives is calculated, for listed instruments, on the basis of market prices ruling at the end of reporting period. When market prices are not available and/or reliable, valuation methods and models are used based on marketderived data (e.g. valuation of listed instruments with similar characteristics, discounted cash flow analysis, option price calculation methods, or valuation used in comparable transactions). 23

26 Notes to the annual accounts (continued) As of 31 March 2011 Note 3 - Significant accounting estimates and judgments (continued) When discounted cash flow techniques are used, estimated future cash flows are based on Board of Directors best estimates and the discount rate is a market related rate for a similar instrument at the statement of financial position date. Where other pricing models are used, inputs are based on market related data at the statement of financial position date. (iii) Interest-bearing loans and borrowings Fair value is calculated based on discounted expected future principal and interest cash flows. Where quoted market prices or broker/dealer quotations are not available, prices for similar instruments or valuation pricing models are considered in the determination of fair value. Valuation pricing models consider contractual terms, position size, underlying asset prices, interest rates, dividend rates, time value, volatility and other statistical measurements for the relevant instruments or for instruments with similar characteristics. These models also incorporate adjustments relating to market liquidity adjustments. These adjustments are fundamental components of the fair value calculation process. The valuation technique used maximises the use of market inputs and minimises the use of entity-specific inputs which are unobservable in the market. Valuation pricing models and their underlying assumptions impact the amount and timing of unrealised gains and losses recognised, and the use of different valuation pricing models or underlying assumptions could produce different financial results. Any changes in the fixed income, equity, and foreign exchange and commodity markets can impact the Bank s estimates of fair value in the future, potentially affecting trading gains and losses. The Bank s estimates of fair value may involve greater subjectivity due to the lack of transparent market data available upon which to base assumptions underlying valuation pricing models. (iv) Other financial assets / liabilities For other financial assets / liabilities with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables / payables are discounted to determine the fair value. (c) Impairment Assets are subject to impairment tests at the end of reporting periods. In determining whether an impairment loss should be recognised, the Bank makes judgements to ascertain whether there is any objective evidence that a financial asset or group of financial assets is impaired. If there is evidence of a longterm reduction in the value of the asset concerned, this is recognized in income statement on the basis of market prices in the case of listed instruments, and of estimated future cash flows discounted according to the original effective interest rate in the case of unlisted instruments. If the reasons for which the loss was recorded subsequently cease to apply, the impairment is written back to profit and loss accounts. (d) Deferred taxes Provisions for income taxes have been calculated on the basis of current, advance and deferred obligations. Advance and deferred tax are calculated on the basis of temporary differences - without time limits - between the carrying amount of an asset or liability and its tax base. Deferred tax assets and liabilities have been stated using the assumptions that the tax base of the assets and liabilities are determined by reference to Luxembourg tax principles. 24

27 Note 4 - Cash and cash balances with central banks (in EUR) 31 March March 2010 Petty cash Cash balances with central banks Total Credit institutions established in Luxembourg are required to hold minimum reserves with the Luxembourg Central Bank. These deposits represent 2% of some of their liabilities. Compliance with the reserve requirement is determined on the basis of the institutions average daily reserve holdings over the maintenance period, thus reserves of credit institutions can vary from one day to another following their treasury management, the money market or their expectations in interest rates. Mandatory reserve deposits with the Luxembourg central Bank are not used in the Bank s day to day operations. Note 5 - Derivatives held for trading Assets (in EUR) They are composed of the positive fair values of interest rate swaps contracts and forward foreign exchange transactions. The Bank has entered into interest rate swaps contracts ( IRS ) mainly in the context of its medium term notes program (see Note 13). These transactions do not qualify for hedge accounting in accordance with IAS 39 provisions. Forward foreign exchange transactions are made, to a large extent, for the purpose of covering, from an economic point of view, the effects of fluctuations in exchange rates on operations made on behalf of customers and, to a non significant extent, for dealing purposes. 31 March March 2010 Listed Unlisted Listed Unlisted Derivative products Derivatives on interest rates Derivatives on foreign exchange rates Total As at 31 March 2011, the global notional amount of the IRS contracts, including IRS with negative fair values, amounts to EUR (2010: EUR ), which is equal to the nominal of the notes (see Note 13). 25

28 Notes to the annual accounts (continued) As of 31 March 2011 Note 5 - Derivatives held for trading Assets (in EUR) (continued) I interest rates Foreign currency total - 31 March 2011 Type of derivatives / Underlying assets Notional Notional Notional Fair value Fair value amount amount amount Fair value Listed derivative products Financial derivatives Other Unlisted derivative products Financial derivatives Other Total I interest rates Foreign currency total - 31 March 2010 Type of derivatives / Underlying assets Notional Notional Notional Fair value Fair value amount amount amount Fair value Listed derivative products Financial derivatives Other Unlisted derivative products Financial derivatives Other Total

29 Note 6 - Available-for-sale equity instruments (in EUR) They are composed of: 31 March March 2010 Listed Unlisted Total As of 31 March 2011 and 2010, unlisted equity instruments are mainly composed of shares in the following affiliated undertakings: Name: Global Funds Management S.A. Registered office: 33, rue de Gasperich, L-5826 Hesperange Proportion of the capital held: 100% Amount of capital and reserves as at : EUR Profit for the year ended : EUR Name: Global Funds Trust Company Registered office: c/o Maples & Calder P.O. Box 309, Ugland House George Town, Grand Cayman, Cayman Islands Proportion of the capital held: 100% Amount of capital and reserves as at : EUR Profit for the year ended : EUR Available-for-sale equity instruments are also composed, for a not significant amount, of other unlisted securities. 27

30 Notes to the annual accounts (continued) As of 31 March 2011 Note 7 - Loans and advances (in EUR) Total net carrying amounts 31 March March 2010 Unlisted loans and advances to: - Credit institutions Non credit institutions Corporate customers Staff Total Impairment allowance for loans and advances As of 31 March 2011 and 2010, the Bank has not booked any specific and/or collective impairment on its loans and advances. Loans and advances to credit institutions - breakdown: 31 March March 2010 Current accounts Term deposits Other loans and advances: Reverse repo transactions Total Loans and advances to non credit institutions - breakdown: 31 March March 2010 Current accounts Term deposits Other loans and advances: Reverse repo transactions Total Guarantees received as collateral The reverse repo transactions are fully secured by government or corporate bonds. 28

31 Note 7 - Loans and advances (in EUR) (continued) Loans and advances to corporate customers breakdown: 31 March March 2010 Current accounts Total Loans and advances to staff breakdown: 31 March March 2010 Credit cards, personal loans and loans guaranteed by payrolls Total Note 8 - Movements in tangible and intangible assets (in EUR) The following table represents the movements which have been occurred on the tangible and intangible assets portfolio during the financial year: Tangible and intangible Gross Additions Disposals/ Gross value Accumulated Net Net assets value at the transfers at the end of depreciation carrying carrying beginning of the financial amount amount the financial year as at as at year 31 March March 2010 Tangible assets ( ) of which: Computer hardware ( ) Office furniture, fixtures, fittings and equipment Cars Intangible assets ( ) of which: Computer software and licences ( )

32 Notes to the annual accounts (continued) As of 31 March 2011 Note 9 - Other assets (in EUR) 31 March March 2010 Accounts receivable for the account of third parties Commissions receivable Prepaid expenses and other items Total Accounts receivable for the account of third parties are Transitory accounts maintained by the Bank for operational purposes. These accounts are linked to the accounts payable for the account of third parties in the Other liabilities (Note 15). Commissions receivable refer to fees receivable for the services (mainly Custodian, Administration and Paying Agency services) rendered by the Bank to its customers. Those commissions are usually claimed on a quarterly basis. 30

33 Note 10 - Derivatives held for trading Liabilities (in EUR) They are composed of the negative fair values of the IRS and the forward foreign exchange contracts. The Bank has entered into the IRS in the context of the medium term notes program (see Note 13). These transactions do not qualify for hedge accounting in accordance with IAS 39 provisions. The Bank enters into forward foreign exchange contracts mainly in the context of clients transactions (these positions are then covered by a reverse transaction in the market) and, to a non significant extent, for dealing purposes. 31 March March 2010 Listed Unlisted Listed Unlisted Derivatives on interest rates Derivatives on foreign exchange rates Total I interest rates Foreign currency total - 31 March 2011 Type of derivatives / Underlying assets Notional Notional Notional Fair value Fair value amount amount amount Fair value Unlisted derivative products Financial derivatives Other Total I interest rates Foreign currency total - 31 March 2010 Type of derivatives / Underlying assets Notional Notional Notional Fair value Fair value amount amount amount Fair value Unlisted derivative products Financial derivatives Other Total

34 Notes to the annual accounts (continued) As of 31 March 2011 Note 11 - Amounts due to credit institutions (in EUR) As of 31 March 2011 and 2010, they are composed of: 31 March March 2010 Current accounts and deposits on demand Loans with agreed maturity Total Note 12 - Amounts due to customers (in EUR) As of 31 March 2011 and 2010, they are composed of: 31 March March 2010 Current accounts Term deposits Total Note 13 - Financial liabilities designated at fair value through profit or loss (in EUR) The Bank issued structured medium term notes with a nominal value of , (2010: ) and with structured coupon rates, including embedded derivatives. The Bank has decided to use the fair value option (see Note 2.2 (b) (v)) to measure these debt certificates under the medium term notes program due to their embedded derivatives. These financial instruments are not listed in an active market. Their fair value is calculated using a valuation technique. In the context of the medium term notes program, the Bank is entered into interest rate swap transactions (see Notes 5 and 10). 32

35 Note 14 - Tax expenses, assets and liabilities (in EUR) The components of income tax expenses, tax assets and tax liabilities for the years ended 31 March 2011 and 2010 are: 31 March March 2010 Current tax assets Deferred tax assets - due to temporary deductible differences Total tax assets Current tax liabilities Deferred tax liabilities - due to temporary taxable differences Total tax liabilities Income tax expenses 31 March March 2010 Current taxes Changes in income tax rate for previous financial years Reversal of tax provision (3.344) --- Deferred tax assets (1.349) (67) Related to previous fiscal exercises (reverse to the income statement) Generated in the fiscal exercise (2.190) (835) Deferred tax liabilities ( ) Related to previous fiscal exercises (reverse to the income statement) ( ) ( ) Generated in the fiscal exercise Total

36 Notes to the annual accounts (continued) As of 31 March 2011 Note 14 - Tax expenses, assets and liabilities (in EUR) (continued) Reconciliation of the total tax expenses A reconciliation between the tax expenses and the accounting profit multiplied by Luxembourg tax rates for the years ended 31 March 2011 and 2010 is as follows: 31 March March 2010 Accounting profit before tax Tax expenses at income tax rate of 29,55% (2010: 29,34%) /- adjustments linked to: income not subject to tax ( ) ( ) non-deductible expenses Other ( ) ( ) Income tax expenses reported in the annual accounts Note 15 - Other liabilities (in EUR) 31 March March 2010 Accounts payable for the account of third parties Salary related contributions Deferred revenues Other Total Deferred revenues include payments received by the Bank for its agency activities within its own medium term notes program and within other debt securities programs carried out by other companies of the Nomura Group for which the Bank delivers agency services (Calculation Agent, Paying Agent and Settlement Agent). Note 16 - Issued capital At 31 March 2011 and 2010, the Bank s authorised, subscribed and paid-up capital amounts to EUR , represented by ordinary shares with a nominal value of EUR each. 34

37 Note 17 - Reserves (including retained earnings) (in EUR) Under Luxembourg law, the Bank must appropriate to a legal reserve an amount equivalent to at least 5% of the annual net profit until such reserve is equal to 10% of the share capital. This appropriation is made in the following year. Distribution of the legal reserve is restricted. The Bank transferred to a net worth tax reserve for the tax year 2010 (2009: ). Luxembourg tax legislation provides for a reduction in the net worth tax equal to its global amount on the condition that a special reserve is established in an amount equal to 5 times the net worth tax charge for the current year, and maintained for 5 years. Allocation of results as of 31 March 2010: Profit of the year Transfer to special reserve for Release from special reserve for 2004 ( ) Allocation to retained earnings Note 18 - Assets and liabilities denominated in foreign currency At 31 March 2011, the aggregate amount of the Bank s assets denominated in currencies other than EUR, translated into EUR, amounts to EUR (2010: EUR ). At 31 March 2011, the aggregate amount of the Bank s liabilities denominated in currencies other than EUR, translated into EUR, amounts to EUR (2010: EUR ). Note 19 - Interest and similar income (in EUR) 31 March March 2010 Loans and advances to central banks Loans and advances to credit institutions Loans and advances to customers Derivatives held for trading Total

38 Notes to the annual accounts (continued) As of 31 March 2011 Note 20 - Interest expenses and similar charges (in EUR) 31 March March 2010 Derivatives held for trading Amounts due to central banks Debt certificates designated at fair value through profit or loss Amounts due to credit institutions Amounts due to customers Total Note 21 - Dividend income At 31 March 2011 and 2010, the dividend income relates to the available-for-sale financial assets. Note 22 - Net fee and commission income (in EUR) 31 March March Administration fees Custody fees Other fees Total fee and commission income Total fee and commission expenses (75.503) (89.776) Net fee and commission income Note 23 - Net realised gains (losses) on financial assets and liabilities not designated at fair value through profit or loss As at 31 March 2011, there is no net realized gains (losses) recognized in this caption. As at 31 March 2010, this caption included mainly gains realized on the sales of available-for-sale financial assets. 36

39 Note 24 - Net (un)realised gains (losses) on financial assets and liabilities held for trading (in EUR) 31 March March 2010 Realized gains Derivatives Foreign exchange IRS Realized losses Derivatives Foreign exchange (348) ( ) IRS ( ) ( ) Unrealized gains Derivatives Foreign exchange IRS Unrealized losses Derivatives Foreign exchange ( ) ( ) IRS ( ) ( ) Total Note 25 - Foreign exchange differences (in EUR) 31 March March 2010 Spot exchange on derivatives and other financial instruments Gains Losses ( ) ( ) Total ( ) 37

40 Notes to the annual accounts (continued) As of 31 March 2011 Note 26 - Administrative expenses (in EUR) 31 March March 2010 Wages and salaries - Wages and salaries Social contributions Other expenses Defined contribution plan Expenses for seconded personnel Total wages and salaries Other administrative expenses - Advisory and audit fees Legal fees Maintenance, repairs and refurbishment Rents and leases Service providers Couriers Telephone and web services Agency and travel expenses Membership subscription IT maintenance and software implementation Outsourcing services Other Total other expenses Total administrative expenses Note 27 - Depreciation and amortization (in EUR) Depreciation Adjustment Amounts 31 March March 2010 for impairment recoveries Tangible assets Intangible assets Total

41 Note 28 - Guarantees, contingent liabilities and commitments (in EUR) The Bank s guarantees and commitments may be analyzed as follows: 31 March March 2010 Guarantees given Financial guarantees Commercial guarantees Irrevocable commitments to lend funds to Banks Customers Total As at 31 March 2011, the Bank s contingent liabilities include rental guarantees for its offices for an amount of (2010: ). As at 31 March 2011, the Bank s contingent liabilities include guarantees granted by the Bank on behalf of its employees to third parties in amount to (2010: ). There were no contingent liabilities toward related parties as at 31 March 2011 and The Bank has also entered into certain other commitments which are not disclosed in the statement of financial position but which are significant for the purposes of assessing the financial situation of the Bank. As at 31 March, details of such other commitments are as follows: 31 March March 2010 Commitments in respect of fixed rental payments contracted for premises There were no such commitments toward related parties as at 31 March 2011 and Legal claims Litigation is a common occurrence in the banking industry due to the nature of the business undertaken. The Bank has formal controls and policies for managing legal claims. Once professional advice has been obtained and the amount of loss reasonably estimated, the Bank makes adjustments to account for any adverse effects which the claims may have on its financial standing. Association pour la Garantie des Dépôts, Luxembourg (AGDL) The Bank is a member of the non-profit making organisation Association pour la Garantie des Dépôts, Luxembourg (AGDL) that was established on 25 September The AGDL has as its sole objective the establishment of a mutual system for the guarantee of cash deposits for the benefit of customers of the member credit institutions of the Association and for claims arising from investment transactions in favour of investors with the credit institutions and investment firms which are members of the Association. 39

42 Notes to the annual accounts (continued) As of 31 March 2011 Note 28 - Guarantees, contingent liabilities and commitments (in EUR) (continued) The guarantee of cash deposits and of claims arising from investment transactions in favour of clients, individuals and certain companies as defined by the regulations is limited to a maximum amount fixed at the equivalent value in all currencies of EUR per cash deposit and EUR per claim arising out of investment transactions. If the guarantee is called, the annual payment to be made by each member is limited to 5% of Shareholders equity. Note 29 - Staff numbers As at 31 March 2011 and 2010, the average number of Bank s staff is as follows: 31 March March 2010 Management Senior 8 7 Management Middle Other staff Total As at 31 March 2011 and 2010, the Bank has granted advances and credits to members of its managerial bodies and has entered into guarantees on their behalf as follows (in EUR): 31 March March 2010 Advances and credits Managerial bodies Guarantees Managerial bodies Note 30 - Audit fees (in EUR) As of 31 March 2011 and 2010, the audit fees are split as follows: 31 March March 2010 Audit fees Audit related fees All other fees Total

43 Note 31 - Risk management (in EUR) The Bank has adopted a three-line defense model as the outline for its governance. Respective roles and responsibilities are detailed below. In the note 31, the concept of hedging is to be understood from an economic point of view and not from an IFRS point of view. Figure: The Bank s Three-Line Defense Model The Board of Directors The Executive Committee (Excom) Business Departments Risk Management Committee (NBLRMC) Audit Committee Legal & Compliance Committee (AMS, DMD, FAC, CUD, NPR, STR, TPA, FES, OPS, TRS) Op Risk Management committee (ORMC) Other risk committees or groups Internal Audit Legal & Compliance Support Departments (HRD, ASD, ICD, TCD, ACC, LCD, PMD, ITD, ISD) Operational Risk Team (QAD dept) 1 st Line of Defence Day to Day Risk Management 2 nd Line of Defence Risk Oversight 3 rd Line of Defence Independent Assurance First Line of Defense The first line of defense is the business and support functions and they have primary responsibility for all risks. They are responsible for meeting the various risk standards and policies. This includes raising any risk events to the relevant team, group or committee, monitoring the related corrective actions, providing Key Risk Indicators ( KRI ), and participating to the control assessment (RCSA, SOX 404, ICAAP ). Responsibility and ownership of the risk should be as close as possible to the activity at its origin, ensuring that effective action is taken to manage risks. 41

44 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Specifically, the roles and responsibilities of the business and support functions are to adhere to the group risk strategy and policies, identify, evaluate and manage risks within the department, raise potential risk issues or incidents, recommend and monitor remedial actions on a timely basis, assess the adequacy and effectiveness of controls and address weaknesses. Second Line of Defense The second line of defense has a role of risk supervision, including setting up of policies and ensuring adherence to it. Operational Risk Team: Each department has to report operational risk incidents to the Operational Risk Team, i.e. the Quality Assurance Department ( QAD ), who has the responsibility for the operational risk framework as per Basel II and Nomura Group adopted approach. The Operational Risk Team reports to the Operational Risk Management Committee and the Executive Committee ( ExCom ). Specifically, the roles and responsibilities of the Operational Risk Team are to assist in the identification, assessment and management of operational risks, assist in determining the effectiveness of controls, monitor the internal incident database and oversee mitigation procedures, ensure KRI collection and the monitoring of the regulatory risks and control assessment regular exercises. Operational Risk Management Committee ( ORMC ): The operational risk management process consists of a number of tools that are used to identify, assess, monitor and escalate operational risks. This process requires an independent body to ensure that necessary action is taken to reduce or mitigate the operational risks that have been identified. This role is fulfilled by the ORMC. The ORMC meets on a monthly basis to review the risk profile of NBL operations, based on the reporting made by the Operational Risk Team and to ensure that operational risk is incorporated within the enterprise wide risk management process. More specifically, the roles and responsibilities of the ORMC are to recommend operational risk strategy and operational risk tolerance to the NBLRMC and the ExCom. They also oversee the implementation and monitoring of the operational risk management framework and review any changes of the Operational Risk Policy and the others methodologies. Other Risk Committees or Groups: Amongst others, are listed: Monthly Interest Rate Review Meeting ( MIRM ), meeting to review and approve acceptable interest rate margin rates for the following month; Project Review Team ( PRT ), meeting on a monthly basis to review and approve NBL projects evolution (financial figures, resources, planning); Pricing Advisory Group ( PAG ), meeting on a monthly basis to raise securities pricing issues and make recommendations to the Fund Management/Trustee; IT Management Committee, meeting on a bi-weekly basis and including heads of IT departments, Information Security and two members of ExCom; Bi-weekly meetings between the head of Information Security Department ( ISD ) and ExCom to review security incidents/ reports and any other topic covered by ISD; 42

45 Note 31 - Risk management (in EUR) (continued) Information Security Committee meeting on a quarterly basis and composed of representatives from IAD, ISD, ITD, LCD and ExCom; QAD-ExCom, meeting on a monthly basis to review Operational Risk issues. All those bodies have also to report any significant risk incidents or exposure to NBLRMC. NBL Risk Management Committee ( NBLRMC ): NBLRMC is the supervisory body of all specific risks management. NBLRMC is responsible, amongst others, to supervise the solution and improvements of weaknesses identified, to perform or participate to any investigation upon ExCom demand, and to consider any development of the NBL s global risk management. As part of its mission, NBLRMC has to identify the risks and related activities that are not yet covered in terms of risk management and do recommendations about an adequate solution and implementation, including the reporting and communication line. NBLRMC is also responsible of ensuring an adequate organization of risk management. Third Line of Defense The third line of defense bodies provide independent assurance that risks are managed appropriately and that policies have been approved and are being adhered to. Internal Audit Department: Internal Audit Department ( IAD ) is responsible for reviewing the overall effectiveness and suitability of the risk framework. They also control, investigate, report and provide recommendations on the breakdown of risk controls. Audit Committee: The Audit Committee is responsible for reviewing the effectiveness and integrity of the risks management systems and controls. Specifically, the roles and responsibilities of the Audit Committee are to review the various risk management frameworks, on behalf of the Board of Directors, issue recommendations and organize regular review of the internal audit programme in relation to any risk. Legal & Compliance Department ( LCD ): The compliance function is an independent function which objective is to identify and evaluate the compliance risk, organize, coordinate and structure compliance-related controls, control and monitor all measures taken to mitigate any compliance issues, and report accordingly to the ExCom and the Board of Directors, as appropriate. Specifically, the roles and responsibilities of the compliance function are to identify and assess the compliance risks associated with NBL s business relationships, advice management on the applicable laws and regulations, and inform them about any developments in these areas. The compliance function is also in charge of assessing the appropriateness of internal policies, procedures and guidelines, ensuring a follow-up of any identified deficiencies, making recommendations for amendments, and supervising the implementation of corrective measures. Legal & Compliance Committee: The Legal & Compliance Committee, which is composed of some LCD staff, IAD head as observer, ExCom and from time to time, the head of NIP (Nomura International Plc.) Legal and Compliance Team, is meeting every 2 months and reviews any legal and compliance matters, projects or incidents whether or not they are associated to regulatory breaches. 43

46 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) ExCom and Board of Directors ExCom: Its authority is delegated from the Board of Directors and its broad responsibilities are to manage day to day activities of NBL, oversee NBL operations, advising the Board of Directors on the formulation and execution of strategic objectives, and the management of all business and risks. It meets on a weekly basis. Specifically for what relates to risk management, its roles and responsibilities are to approve the risk management policies and the risk appetite of NBL, set the guidelines for those risk frameworks organisation and governance, promote the risk strategy within NBL and review it at least annually and whenever there is a significant change in the business. The Board of Directors: The Board of Directors of NBL have ultimate responsibility for risk and must satisfy themselves that the risk policies are functioning effectively. Additionally, they are responsible for approving those risk policies, defining and approving the risk appetite and ensure that the risk management frameworks are functioning effectively. (a) Market Risk: qualitative information Market risk is the risk of any impact on the Bank s financial condition due to adverse market movements caused by market variables including, but not limited to, interest rates, foreign exchange rates, equity prices, credit spreads and ratings. Exposure to this type of risk primarily results from trading activities. The Bank has limited dealing activities on its own account, exclusively related to foreign exchange and interest rate products. The size of this activity is expected to remain limited and the related exposure to market risk is considered as non-material by the Bank. The Bank is therefore not subject to equity risk, commodity risk or basis risk. The economic value of the Bank could however be impacted by adverse movement in interest rates and/or foreign exchange rates. (i) Interest Rate Risk Interest rate risk is the potential adverse change in the economic value of a financial instrument or portfolio due to fluctuating interest rates. It is a Bank practice not to have any material mismatch of assets and liabilities in terms of interest rate. The analysis of the balance sheet split by time bucket reveals that the Bank is mainly exposed to interest rate risk for periods less than 1 year. The long term debt schedule, corresponding to the notes issued within the MTN program, is perfectly offset by the notional amount of the IRS reported on the assets and liabilities side. Despite this observation, according to the CSSF circular 08/338, a calculation is performed twice a year to assess the impact on NBL balance sheet of a +/-200 bps movement in interest rates. The results indicate that the impact of a 200 bps increase of the interest rates on the economic value of the Bank as of 31 December 2010 (last available calculation) would be (31 December 2009: ). 44

47 Note 31 - Risk management (in EUR) (continued) On the other hand, the impact of a decrease of 200 bps would be (31 December 2009: ). This stress test confirmed the non-material nature of interest rate risk to the Bank. (ii) Foreign Exchange Risk Exchange rates risk is the risk of loss arising from future movements in the exchange rates applicable to the currency positions maintained by the Bank. Similarly to all market risks, foreign exchange risk arises from both open and imperfectly offset or hedged positions. Foreign Exchange Risks on Own Positions As agent acting upon the orders of its clients, the Bank deals almost entirely spot and forward transactions in JPY, USD as well as currencies of other markets. The highest transaction volumes are being performed on USD and JPY currencies. The Treasury Department has to cover each customer s position, trading or hedging intra-day. As such, no speculative transactions are carried out by the Bank for its own account. Moreover, a general policy of not taking any speculative currency position has been set up by the Bank, detailing the allowed open currency position limits. These limits are the following: Open currency position less than EUR or equivalent per currency (with the exception of EUR equivalent for both the USD and the JPY); Aggregate open position of EUR equivalent. Based on the extreme assumptions that the global limit of EUR equivalent is reached and Euro appreciates by 10% in one week compared to open currency positions, the stress test indicates an impact of EUR on the income statement. Treasury Control Department also performs an independent check against Treasury Department figures and reports to ExCom. Foreign Exchange Risks on the Custody and Administration Fees Another source of forex risk relates to the mismatch between expenses (mainly in EUR) and revenues as the invoices to funds clients are denominated in non-eur currencies (mainly in USD and JPY). Treasury Department has set up a procedure for converting estimated cash inflows resulting from its main source of revenues: the fund custody and administration fees. The Treasury Department monitors the trends of exchange rate curves and may suggest converting measures to cope with the risk attached to the negative variation of exchange rates. This process allows the Bank to reduce its exposure on forex risk. (b) Credit risk Credit risk is the risk that unexpected losses may arise as a result of the Bank s borrowers or market counterparties failing to meet their obligations to pay. While loans are the largest and most obvious source of credit risk, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book, and both on and off the balance sheet (derivatives transactions, acceptances, interbank transactions, forex transactions, bonds, etc.). 45

48 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) (i) Counterparty Credit Risk Counterparty credit risk is the risk that counterparty will default before settlement in a particular transaction. Counterparty credit risk is the risk that an organization does not pay out on a credit derivative, credit default swap, credit insurance contract, or other trade or transaction when it is supposed to. Because of the nature of its activity, the Bank enters into a reduced set of transactions for its own account. The credit risk management and monitoring is performed by NIP which is the London-based securities broker/dealer operating company. A credit risk policy (Credit Policies and Procedures) has been issued by the NIP Investment Evaluation & Credit Department in London. The exposures of the Bank to counterparty risk differs according to its activities but are mainly dealt with Nomura group entities (Nomura Bank International Plc ( NBI ) and NIP) for the deposit. Forex transactions are mainly dealt with NIP. On-Balance Sheet Transactions The counterparty risk for on-balance sheet activities mainly concerns deposits that are done on a daily basis by Treasury Department. The major part of this liquidity comes from the cash held on the funds cash accounts under the Bank s custody. These cash positions are then placed on the market by the Bank in terms of deposits with NBI and external counterparties to guarantee a sufficient diversification, and reverse repos with NIP, subject to best market/competitive conditions application. Every day, the Treasury Department in charge of cash management monitors its credit limits on the peak exposure of outstanding trades and the maximum tenor, which is a time limit of the exposure, as well as the regulatory large exposures limits that reduce the exposures to a maximum of EUR 150 million by counterparty. These exposures are compared to the credit limits to define which initial or additional positions may be taken with a specific counterparty. At the end of the day, Treasury Control Department ( TCD ), an independent department in charge of the treasury control, performs relevant exposure control and monitoring. Moreover, a credit risk report is sent by TCD on a daily basis to the ExCom. Every morning, an extraction of all deposits as of last business day is provided to the Investment Evaluation & Credit Department of NIP and the same day, the Treasury Department, the Treasury Control Department and the ExCom receive from NIP a detailed report containing all the limits (exposure and tenor) and the actual positions by counterparty. On top of the Bank s internal applicable controls, NIP also performs the credit exposure monitoring for the nostro accounts the Bank holds with its counterparties and for the overdrafts of the funds accounts in the Bank s books. Off-Balance Sheet Transactions Forex The net currency position of the Bank for credit risk exposure on forex transactions made for its own account remains quite low. Indeed, there is an internal policy preventing Treasury Department to take an aggregate forex exposure exceeding EUR equivalent for its own account. 46

49 Note 31 - Risk management (in EUR) (continued) The Bank also enters into forex transactions with investment funds. In this case, the Bank is the counterparty of the Fund and an opposite forex is performed with market counterparties (mainly NIP). Interest Rate Swaps ( IRS ) The Bank s exposure to IRS comes from the Medium-Term Notes ( MTN ) program where the Bank is issuing its own Notes. In that respect, the Bank, as an issuer, is not exposed to credit risk but may be exposed to interest rate risk. In order to cover this risk, the Bank enters into Interest Rate Swaps with Nomura Securities Company ( NSC ) every time a Note is issued. This systematic IRS transaction covers the interest rate risk but creates an exposure to a counterparty risk with NSC. As at 31 March 2011, the exposure to NSC represented EUR (nominal amount), of which EUR less than one year (2010: exposure to NSC: nominal of EUR 141 million, of which EUR 108 million less than one year). Netting agreement As a credit risk mitigation technique, the Bank has decided to enter into netting agreements with certain counterparties. These contractual netting agreements create a single legal obligation, covering all included transactions, such that, in the event of a counterparty s failure to perform owing to default, bankruptcy, liquidation or any other similar circumstance, the credit institution would have a claim to receive or an obligation to pay only the net sum of the positive and negative mark-to-market values of included individual transactions. These netting agreements have been subject to legal opinions and have been submitted to the CSSF for recognition as credit risk mitigation technique. So far, the Bank has signed netting agreements with five counterparties being Cayman-based funds, covering foreign exchange transactions. The impact of these netting agreements is an estimated reduction of the credit risk capital allocation of 40%. Collateral Management Activities The Bank is engaged in the following collateral management programmes: Pledge of assets Main credit risk exposure towards the investment funds comes from forward foreign exchange transactions. In order to reduce this exposure, the Bank has entered into pledge agreements with certain investment funds allowing taking financial collateral (cash or securities). The securities pledged to the Bank meet the eligibility criteria prescribed by the CSSF circular 06/273 as amended by CSSF circular 10/475. Pledge agreements are considered for investment funds having a size of USD 1,5 billion or more. The exposure of existing investment funds are reviewed on a daily basis, to identify those without pledge agreement and for which the exposure reaches EUR 20 million, to allow appropriate and timely set-up of a pledge agreement. In case the exposure with one investment fund is going to exceed 25% of the Bank s eligible own funds, the adequate amount of eligible collateral is transferred from the investment fund s portfolio and pledged to the collateral account in order to keep the exposure below the 25% limit. 47

50 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Margin calls under CSA For the forward foreign exchange transactions concluded between the Bank and external counterparties, both counterparties to the transaction manage the economic potential loss or gain and require that collateral is allocated to cover the exposure, through a margining process. The Bank has entered into ISDA/CSA agreements with external counterparties, which describe all the collateral requirements (eligibility, valuation, conditions) that must be followed to cover the mark-to-market exposure arising from these transactions. In order to make sure that the margin calls are correctly handled, the Bank actively monitors the forward foreign exchange markto-market exposure and coverage on a daily basis. The conditions are negotiated by the Bank with the brokers, and are in line with the Group Credit Risk guidelines. Securities Lending For the securities lending activity, the Bank acts as an agent to allow NIP, which is the exclusive borrower, to borrow securities from the portfolios of the investment funds that agree to participate as lenders. All the securities lent to NIP are pledged by collateral (USD cash amount or G-10 government bonds) in order to cover the counterparty risk. This collateral must represent 105% of the market value of the lent securities. As agent, the Bank has the responsibility to manage the collateral pledged to cover the counterparty risk. The high eligibility criteria ensure appropriate liquidity of the collateral and the 105% margin covers the potential losses and costs generated by the lent securities buy-in. European Central Bank ( ECB ) Operations The Bank is also engaged in the refinancing operation program with the European Central Bank ( ECB ), and which is operated through National Central Banks. The counterparty for the Bank is therefore the Banque Centrale du Luxembourg ( BCL ). It enables Euro-zone banks to borrow cash amounts from the ECB against a pledge of collateral to guarantee the loan. The liquidity so obtained from BCL is then lent to NBI or NIP, in the form of a repurchase agreement. In the opposite flow, the Bank receives securities from NIP as collateral to cover the exposure with NIP. 48

51 Note 31 - Risk management (in EUR) (continued) The table below shows the maximum exposure to credit risk for financial assets. The maximum exposure is shown before the effect of mitigation through the use of collateral agreements. Maximum Maximum exposure exposure 31 March March 2010 Balances with central banks Derivatives held for trading Available-for-sale equity instruments Loans and advances Total Where financial instruments are recorded at fair value, the amounts shown above represent the current credit risk exposure but not the maximum risk exposure that could arise in the future as a result of change in values. Maximum Maximum exposure exposure 31 March March 2010 Guarantees

52 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Credit quality per class of financial assets The table below shows the credit quality by class of credit risk assets, based on the Bank s credit rating system (outstanding carrying amounts at the reference date). Neither past due nor impaired Prime Quality High grade Standard Sub- Not rated Past due or total 31 March 31 March grade standard individually 31 March March grade impaired March 31 March Cash and balances with central banks Derivatives held for trading Available-for-sale equity instruments Loans and advances Total Neither past due nor impaired Prime Quality High grade Standard Sub- Not rated Past due or total 31 March 31 March grade standard individually 31 March March grade impaired March 31 March Cash and balances with central banks Derivatives held for trading Available-for-sale equity instruments Loans and advances Total Note: Prime quality: AAA High grade: AA-A Standard grade: BBB-BB Sub-standard grade: B and less 50

53 Note 31 - Risk management (in EUR) (continued) Geographical allocation of risks As at 31 March 2011 and 2010, the distribution by geographical area of the risks held in the derivatives held for trading and Loans and advances before taking into account collateral held and other credit enhancements can be summarized as follows: 31 March March 2010 Australia Belgium Japan Canada Germany Denmark Spain Finland France United Kingdom Italy Luxembourg USA Cayman Islands Others Total

54 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Sectorial allocation of risks An industry sector analysis of the Bank s derivatives held for trading and Loans and advances, before and after taking into account collateral held or other credit enhancements, without considering credit risk assets included in disposal groups classified as held for sale, is as follows: 31 March March 2010 G gross maximum Net maximum Gross maximum Net maximum exposure exposure exposure exposure Financial services Other Total Net maximum exposure consists of the gross maximum exposure less the amount of the collateral received at the reference date. Concentration of risk Concentration risk arises where the Bank becomes overly focused on one particular counterparty, business area, issuer or geographical region thereby meaning the Bank s performance could be overly influenced by a small number of factors. The transposition of CRD II Directives via the CSSF circular 10/475 has affected the Large Exposures regime. In that scope, the Bank has asked for and has been granted by CSSF in December 2010 a partial exemption for its intra-group transactions as follows: With NBI, the Bank is benefiting from a global exemption up to EUR 1,5 billion; With NIP, the Bank is benefiting from an exemption on forward exchange derivative transactions up to EUR 1,3 billion credit risk equivalent. At the same time, the Bank has addressed the concentration risk in diversifying the remaining part of the unsecured exposures with external counterparties and in setting up an internal limit, defined in the Liquidity Management Policy, which requires that 20% of the investment funds cash is placed outside the Group. In order to avoid a too high concentration of risks, the Bank is required to respect two criteria under Luxembourg law. Firstly, in order to avoid a too high concentration of risk, the Bank is required to observe the following limit on a permanent basis: The total risk exposure towards a single client or group of connected clients must not exceed 25% of the own funds of the Bank. For exposures towards the Group, please refer to previous paragraphs. As the Bank is involved at 99% with high rated financial institutions established in OECD countries with stable political and economical environment, the country risk can be considered as limited. 52

55 Note 31 - Risk management (in EUR) (continued) The second criterion is the solvency ratio. This ratio, as defined by the applicable regulation, defines the minimum amount of own funds that the Bank has to maintain in relation to the total weighted credit risk of the assets and off-balance sheet. The minimum limit is 8%. As of 31 March 2011, the solvency coefficient of the Bank was 12,42% (2010: 10,76%). Impairment As of 31 March 2011 and 2010, neither specific, nor collective impairments have been recorded by the Bank. (c) Liquidity risk Liquidity for a bank is the ability to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses, in both normal and stressed circumstances. Liquidity risk is composed of Funding liquidity risk and of Market liquidity risk. Funding liquidity risk is the risk that the Bank will not be able to meet efficiently both expected and unexpected current and future cash flows and collateral needs without affecting either daily operations or the financial conditions of the Bank. Market liquidity risk is the risk that a Bank cannot easily offset or eliminate a position at the market price because of inadequate market depth or market disruption. Because liquidity risk can be corollary to other risks, such as credit risk and market risk, the liquidity risk management framework has been designed to fit into the overall enterprise risk management framework. (i) Liquidity Risk Profile It is the Bank s policy to have no material mismatch of assets and liabilities. The Bank does not have a trading book, and so does not hold significant securities for its own account. The Bank is a liability-driven bank which deposits the majority of its funds with intra-group companies. In turn, the parent company is the main access point to the interbank market and it also acts as lender of last resort for the Bank. Regarding off-balance sheet items, the Bank has entered into: IRS to hedge the MTN program; Currency forward contracts taken for the investment funds (1 leg with the funds, 1 leg with brokers, both legs offset each other). (ii) Liquidity Risk Appetite The Bank ensures that its liquidity ratio is exceeding, at all times, an internal warning threshold that has been defined at 50%. The Bank s liquidity profile fits well within NEHs (Nomura Europe Holdings Plc.) liquidity risk appetite which is itself in line with the global liquidity risk appetite of the group. The latter is defined as holding a sufficient liquidity portfolio of high quality assets to survive two severe stress scenarios without the ability to raise or roll unsecured financing or liquidation of assets. (iii) Liquidity Risk Exposure Based on its strategy and balance sheet structure, it appears that the Bank is not directly exposed to funding liquidity risk as it would only place the cash made available by its clients. The Bank is not either exposed to market liquidity risk as it does not hold securities for its own account and does not require any collateral from intra-group companies. 53

56 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Liquidity risk exposure for the Bank may derive from other risks. Counterparty Settlement Risk: the failure of the Bank counterparties would impair its cash flows and hence its ability to meet its commitments as they fall due; Concentration Risk: the Bank has a high concentration with Nomura group. This risk has been the focus of liquidity risk stress testing; Operational Risk: this can be a source of liquidity disruptions. In particular, significant problems can develop very quickly if the systems that process payment transactions or participants fail or delay transactions. Similarly, disruptions can be caused by operational problems at the level of critical participants or key third-party service providers. (iv) Liquidity Measurement and Stress Testing The Bank has performed a cash flow projection based on a maturity mismatch approach over a 1-year horizon. The projection shows that in normal circumstances the Bank is able to meet its payment obligations. The Bank is relying on its parent company to support its liquidity in stressed times. But the Bank has nevertheless identified and stressed extremely severe scenarios with low probability but still plausible. The result is that the Bank has a good level of liquidity. The impact on the Bank s liquidity would materialize under the high severity simulation of one scenario and under another scenario but only for one day. If the Bank were to face these fat-tail events, the Bank s cash balance would be in overdraft one day. The Bank is able to support the cost of this one-day overdraft interests but is also considering possible alternatives to close the gap (e.g, reducing the intra-group concentration so that the Bank remains with positive cash flow in any stressed scenarios ). (v) Liquidity Risk Controls and Mitigation Treasury Department provides ExCom members with a daily report which gives an overview of the liquidity situation of the Bank, including a high-level status of the intra-group concentration. This same information is also used to produce the Monthly Global Treasury Report for reporting to Global Treasury in London. Treasury Department sends daily to Global Treasury London the Outstanding Deposits File and the Cash variation between T+1 and T+2. Those reports are consolidated by Global Treasury who sends a summary report back to the Bank and all the concerned entities. As well, a daily liquidity conference call is held with Global Treasury London to discuss the liquidity situation at group level and share business information having a liquidity impact. Treasury Control Department performs a daily analysis of concentrations in terms of counterparties and currencies. Treasury Control Department monitors daily the liquidity ratio and verifies that it is maintained at 50% at least. A daily liquidity report is run daily and submitted to LCB. This report identifies the cash inflows and outflows expected in the upcoming five days. Lastly, in case of emergency situation of liquidity shortage, the ExCom can invoke the Emergency Funding Procedures issued by the Global Funding, Risk and Cash Management team ( Global FRCM ) from NIP. These procedures have been set-out to deal with serious adverse market conditions. They operate on an incremental escalation basis with status levels as green, amber and red dependent on severity of the conditions. 54

57 Note 31 - Risk management (in EUR) (continued) (vi) Liquidity Risk Exposure Throughout the financial market turmoil, the Bank has not faced any liquidity problem, notably regarding the availability of liquidity. In view of the stress testing results, the Bank has a better visibility on the areas where it should focus. The Bank has now the quantitative and qualitative elements to define its liquidity buffer and triggers of emergency cases. Since 2010, the Bank has been enhancing its liquidity risk management framework and formalizing the related policies and methodologies as well as its local contingency plan. Mitigation actions described above successfully prevent the Bank from being exposed to liquidity issues. 55

58 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) Duration analysis The tables below present the analysis of financial liabilities of the Bank by remaining contractual maturity dates: 31 March 2011 < 1month 1 month 3 months 6 months 1 year 2 years Undeter- Total < 3 months < 6 months < 1 year < 2 years < 5 years mined Deposits from central banks Derivatives held for trading Financial liabilities designated at fair value through profit or loss Amounts due to credit institutions Amounts due to customers Total financial liabilities March 2010 < 1month 1 month 3 months 6 months 1 year 2 years Undeter- Total < 3 months < 6 months < 1 year < 2 years < 5 years mined Deposits from central banks Derivatives held for trading Financial liabilities designated at fair value through profit or loss Amounts due to credit institutions Amounts due to customers Total financial liabilities

59 Note 31 - Risk management (in EUR) (continued) Duration analysis The tables below present the analysis of the guarantees of the Bank by remaining contractual maturity dates: 31 March 2011 < 1month 1 month 3 months 6 months 1 year 2 years 5 years Undeter- Total < 3 months < 6 months < 1 year < 2 years < 5 years mined Guarantees March 2010 < 1month 1 month 3 months 6 months 1 year 2 years 5 years Undeter- Total < 3 months < 6 months < 1 year < 2 years < 5 years mined Guarantees

60 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) (d) Foreign exchange risk Foreign exchange risk is the risk that the value of an asset or liability will fluctuate due to changes in foreign exchange rates. As at 31 March 2011 and 2010, the assets and liabilities denominated in EUR, in JPY, in USD and in other currencies are as follows: 31 March 2011 eur jpy usd Other total Cash and balances with central banks Derivatives held for trading Available-for-sale equity instruments Loans and advances Loans and advances to credit institutions Loans and advances to customers Tangible assets Intangible assets Deferred tax assets Other assets Total Assets March 2011 eur jpy usd Other total Deposits from central banks Derivatives held for trading Debt certificates designated at fair value through profit or loss Financial liabilities measured at amortised cost Amounts due to credit institutions Amounts due to customers Tax liabilities of which: deferred tax liabilities Other liabilities Total Liabilities

61 Note 31 - Risk management (in EUR) (continued) 31 March 2010 eur jpy usd Other total Cash and balances with central banks Derivatives held for trading Available-for-sale equity instruments Loans and advances Loans and advances to credit institutions Loans and advances to customers Tangible assets Intangible assets Deferred tax assets Other assets Total Assets March 2010 eur jpy usd Other total Deposits from central banks Derivatives held for trading Debt certificates designated at fair value through profit or loss Financial liabilities measured at amortised cost Amounts due to credit institutions Amounts due to customers Tax liabilities of which: deferred tax liabilities Other liabilities Total Liabilities

62 Notes to the annual accounts (continued) As of 31 March 2011 Note 31 - Risk management (in EUR) (continued) (e) Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or the fair values of financial instruments. The tables below show the interest rate risk by maturity dates: 31 March 2011 < 1 month 1 month 3 months 6 months 9 months 12 months Total < 3 months < 6 months < 9 months < 12 months or Undetermined Cash and balances with central banks Derivatives held for trading (IRS) Loans and advances Loans and advances to credit institutions Loans and advances to customers Total March 2011 < 1 month 1 month 3 months 6 months 9 months 12 months Total < 3 months < 6 months < 9 months < 12 months or Undetermined Deposits from central banks Derivatives held for trading (IRS) Debt certificates designated at fair value through profit or loss Financial liabilities measured at amortised cost Amounts due to credit institutions Amounts due to customers Total Gap ( ) ( ) ( ) ( )

63 Note 31 - Risk management (in EUR) (continued) 31 March 2010 < 1 month 1 month 3 months 6 months 9 months 12 months Total < 3 months < 6 months < 9 months < 12 months or Undetermined Cash and balances with central banks Derivatives held for trading (IRS) Loans and advances Loans and advances to credit institutions Loans and advances to customers Total March 2010 < 1 month 1 month 3 months 6 months 9 months 12 months Total < 3 months < 6 months < 9 months < 12 months or Undetermined Deposits from central banks Derivatives held for trading (IRS) Debt certificates designated at fair value through profit or loss Financial liabilities measured at amortised cost Amounts due to credit institutions Amounts due to customers Total Gap ( ) ( ) ( ) (f) Operational risk Segregation of duties, internal procedures, and technological systems in force mitigate the risk of losses due to errors or inadequacies. (g) Profitability risk Profitability risk is low due to the fact that management maintains sufficient control over its margins and costs in order to ensure continued profitability. 61

64 Notes to the annual accounts (continued) As of 31 March 2011 Note 32 - Fair value of financial instruments (in EUR) The following table summarises the carrying amounts and fair values of financial assets and liabilities measured at amortized cost in the statement of financial position. C carrying amount Fair value 31 March March March March 2010 Assets Balances with central banks Loans and advances Liabilities Deposits from central banks Financial liabilities measured at amortised cost The fair value of the financial assets and liabilities corresponds to the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value hierarchy As at 31 March 2011, the Bank uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation techniques: Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities. This level includes listed equity securities and debt instruments on exchanges (for example, London Stock Exchange, Frankfurt Stock Exchange, New York Stock Exchange) and exchanges traded derivatives like futures (for example, Nasdaq, S&P 500); Level 2: techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly; Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. 31 March 2011 (in EUR) Level 1 Level 2 Level 3 total Derivatives held for trading Available-for-sale equity instruments Total financial assets Derivatives held for trading Financial liabilities designated at fair value through profit or loss Total financial liabilities

65 Note 32 - Fair value of financial instruments (in EUR) (continued) 31 March 2010 (in EUR) Level 1 Level 2 Level 3 total Derivatives held for trading Available-for-sale equity investments Total financial assets Derivatives held for trading Financial liabilities designated at fair value through profit or loss Total financial liabilities During the reporting year ending 31 March 2011, there were no transfers between Level 1 and Level 2 categories, and no transfers into and out of Level 3 category. During the year ending 31 March 2011, the movement in the Available-for-sale equity instruments classified in the level 3 mainly results from the revaluation of the related assets at their fair value. During the year ending 31 March 2011, the movement in the financial liabilities designated at fair value through profit or loss can be analysed as follows: Financial liabilities designated at fair value through profit or loss as of 31 March Total profit recognised in the income statement Issues Redemptions ( ) Transfers from/to Level Foreign exchange rates fluctuations ( ) Financial liabilities designated at fair value through profit or loss as of 31 March

66 Notes to the annual accounts (continued) As of 31 March 2011 Note 33 - Capital management The Bank maintains an actively managed capital base to cover risks inherent in the business. The adequacy of the Bank s capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking Supervision (BIS rules/ratios) and adopted by the Commission de Surveillance du Secteur Financier supervising the Bank. During the years ended 31 March 2011 and 2010, the Bank had complied in full with all its externally imposed capital requirements. Note 34 - Retirement benefit plan Since 2002, the Bank has entered into an agreement for payment of the retirement pension charges under the corporate defined contribution pension plan organized by its Parent company. Only expatriate employees of the Bank are entitled to participate into this corporate pension plan. Note 35 - Related party disclosures (in EUR) The Bank has a related party relationship with its Parent company, entities of its Group and with its directors and executive officers. The amounts of assets, liabilities, income and expenses as at 31 March 2011 and 2010 concerning Group entities, subsidiaries and the Parent company are as follows: 31 March March 2010 Derivatives held for trading Available-for sale-equity instruments Loans and advances Total assets Derivatives held for trading Financial liabilities measured at amortized cost Total liabilities

67 Note 35 - Related party disclosures (in EUR) (continued) For guarantees granted to Managerial bodies, please refer to Note 29. Income and expenses 31 March March 2010 Net interest income Dividend income Net fee and commission income Net realised gains (losses) on financial assets and liabilities not designated at fair value through profit or loss The Bank s incurred in expenses with respect to the remuneration of the members of the administrative, management and supervisory bodies of the Bank are as follows: 31 March March 2010 Supervisory bodies Managerial bodies Corporate pensions Total Note 36 - Events after the statement of financial position date The Bank is not aware of any adjusting or non-adjusting event that would have occurred between 31 March 2011 and the date when the present annual accounts were authorised for issue. 65