[Disclosure Booklet]

Transcription

1 <Translation> [Disclosure Booklet] Explanatory Documents on the Status of Business and Property for the fiscal year ended Dec 31, 2017 This disclosure booklet is prepared by the Company to publish with utilization of internet under Article 46-4 of the Financial Instruments and Exchange Law.

2 Contents I Outline and Organization 1. Corporate Name 1 2. Registration Date ( Registration Number ) 1 3. History and Organization 1 4. Shareholders in the Top 10, Number of Shares Held and Percentage of Voting Rights 3 5. Names of Board of Directors and Statutory Auditor 3 6. Names of Employees Specified by Cabinet Order 3 7. Business Operation 4 8. Addresses of Head Office and Other Branches 5 9. Other Business Operation Engaged Businesses included in the Matters Set Forth in Article 29-2(1)(VI) of FIEL and Article 7(3)(a), (3)-2, (3)-3(a) and from (4) to (9) of the Cabinet Office Ordinance on Concerning Financial Instruments Business Complaint Processing and Dispute Resolution Financial Instruments Firms Associations and Certified Investor Protection Organization Memberships Financial Instruments Exchange Memberships Investor Protection Fund Membership 7 II Business Overview 1. Business Outline for the Current Period 8 2. Key Financial Data 10 III Financial Matters 1. Financial Information Major Lenders and Borrowings Securities Held (Non-Trading) Derivative Transactions (Non-Trading) External Audit Others 19 IV Internal Control Structure 1. Overview of Internal Control Condition of Customers' Assets Segregation 22 V Status of Consolidated Subsidiaries, etc. 26

3 I Outline and Organization 1. Corporate Name Citigroup Global Markets Japan Inc. (the Company) 2. Registration Date September 30, 2007 ( Registration Number ) (The Director-General of the Kanto Finance Bureau (Kinsho) No.130) 3. History and Organization (1) History Year History 1972 Smith Barney Tokyo Representative Office established 1977 Salomon Brothers Asia Limited established in Hong Kong 1980 Salomon Brothers Asia International Tokyo Representative Office established Smith Barney Tokyo Branch opened 1982 Salomon Brothers Asia Limited Tokyo Branch opened 1987 Becomes Remote Member of Osaka Securities Exchange 1988 Becomes Official Member of Tokyo Stock Exchange 1989 Becomes Standing Underwriting Manager for JGB syndication Becomes Clearing Member of Tokyo International Financial Futures Exchange Becomes Special Participant of Nagoya Stock Exchange 1991 Becomes Official Member of Osaka Securities Exchange 1998 Salomon Smith Barney (Japan) Limited formed upon Salomon Brothers Asia Limited's acquisition of all operations of Smith Barney Tokyo Branch 1999 Name changed to Nikko Salomon Smith Barney Limited upon acquisition of Nikko Securities' institutional businesses Becomes Official Member of Nagoya Stock Exchange 2004 Begins operation as Nikko Citigroup Limited 2008 Nikko Citi Holdings Inc. established 2009 Name changed to Citigroup Global Markets Japan Inc Japan headquarters moved to Otemachi Park Building 1

4 (2) Organization Chart As of December 31,

5 4. Shareholders in the Top 10, Number of Shares Held and Percentage of Voting Rights As of December 31, 2017 Number of shares Percentage of Name of shareholders held voting rights Citigroup Japan Holdings G.K. 3,842, % Total 1 party 5. Names of Board of Directors and Statutory Auditor Director, Chairman Statutory Auditor Position Representative Director, President and CEO Director, Deputy President Director, Deputy President Director Name Anthony P. Della Pietra, Jr. Kuniyoshi Hayashi Yusuke Asai Koichi Tanaka Tatsuo Tanaka Mamoru Sato As of December 31, 2017 executive/ Representation non-executive Yes No No No No executive executive executive executive executive executive 6. Names of Employees Specified by Cabinet Order (1) Persons overseeing the operations concerning the guidance for compliance with the laws and regulations, etc. with respect to the financial instruments business As of December 31, 2017 Name Title Matt van Weezel Head of Compliance Division, Chief Internal Control Officer Yasuto Hashinaga Interim General Counsel (2) Persons overseeing the division to make an advice or conducting management with respect to the investment advisory business and investment management business Not applicable 3

6 7.Business Operation (1) Type I Financial Instruments Business 1 Businesses under Article 28(1) (i) of Financial Instruments and Exchange Law (hereinafter referred to as the "FIEL") (i) Sale and purchase of Securities (excluding those falling under the category of Derivative Transactions; the same shall apply hereinafter), Exchange traded Derivatives (excluding Financial Instruments (limited to those in Article 2(24) (iii-2)) or Financial Indices (limited to the value of the Financial Instruments or figures calculated based thereon) related Exchange traded Derivatives (the same shall apply "Commodities related Exchange traded Derivatives" hereinafter ) or Foreign Exchange traded Derivatives (ii) Transactions (excluding sale and purchase of Securities falling under Article 2(8) (x) of FIEL) Intermediary ("Baikai"), brokerage ("Toritsugi") (excluding Brokerage for Clearing of Securities,etc.) or agency service ("Dairi") for sale and purchase of Securities, Exchange traded Derivatives or Foreign Exchange traded Derivatives Transactions (excluding intermediary ("Baikai"), brokerage ("Toritsugi") or agency service ("Dairi") for sale and purchase of Securities falling under Article 2(8) (x) of FIEL) (iii) Intermediary ("Baikai"), brokerage ("Toritsugi") or agency service ("Dairi") for agency ("Itaku") of the following transactions; (a) Sale and purchase of Securities conducted in a Financial Instruments Exchange Market or Exchange traded Derivatives; or (b) Sale and purchase of Securities conducted in a Foreign Financial Instruments Market (meaning a market in a Foreign State similar to Financial Instruments Exchange Market; the same shall apply hereinafter) or Foreign Exchange traded Derivatives Transactions (iv) Brokerage for Clearing of Securities, etc.; or (v) Secondary Distribution of Securities or exclusive Offer to Sell, etc. to Professional Investors (vi) The handling of a Public Offering or Secondary Distribution of Securities, or the handling of a Private Placement of Securities or exclusive Offer to Sell, etc. to Professional Investors 2 Business under Article 28(1) (ii) of FIEL Over-the-Counter Transactions of Derivatives or intermediary ("Baikai"), brokerage ("Toritsugi") ( excluding Brokerage for Clearing of Securities,etc.) or agency service ("Dairi") therefor; or, Brokerage for Clearing of Securities, etc. in relation to Over-the-Counter Transactions 3 Business under Article 28(1) (iii) (a) of FIEL Wholesale Underwriting of Securities that are specified by a Cabinet Order as those for which management of risks of loss is highly necessary 4 Business under Article 28(1) (iii) (b) of FIEL Wholesale Underwriting of Securities other than those listed in Article 28(1) (iii) (a) of FIEL 5 Business under Article 28(1) (iii) (c) of FIEL Acts listed in Article 2(8) (vi) that are other than Wholesale Underwriting of Securities 6 Securities, etc. Management Business (2) Type II Financial Instruments Business (3) Investment Advisory and Agency Business 1 Business under Article 28(3) (ii) of FIEL. Agency or intermediation for the conclusion of an Investment Advisory Contract or a Discretionary Investment Contract (Note) The Company obtained registration to conduct the Investment Advisory and Agency Business on April 25th 2017 and commenced the Business on Jun 20th

7 (4) Supplemental Business Operation to Financial Instruments Business (i.e. the business conducted by the Company listed in Article 35(1) of FIEL) 1 Lending and borrowing of Securities, or intermediary ("Baikai") or agency service ("Dairi") thereof 2 Money loan incidental to a margin transaction 3 Money loan secured by Securities that are deposited for safe custody from customers 4 Agency service ("Dairi") for customers concerning Securities 5 Agency service ("Dairi") of the business pertaining to payment of earnings, redemption money or cancellation money with regard to beneficiary securities of Investment Trusts or foreign investment trusts, or the business pertaining to delivery of the Securities or any other assets belonging to the trust property pertaining to the Securities 6 Agency service ("Dairi") of the business pertaining to distribution of money, distribution of refunds or residual assets or payment of interest or redemption money with regard to Investment Securities, Investment Equity Subscription Rights Certificates or Investment Corporation Bonds, or Foreign Investment Securities 7 Conclusion of a Contract for Cumulative Investment 8 Provision of information or advice in relation to Securities 9 Agency service ("Dairi") of the business of any Counterparty Financial Business Operator, etc. 10 Retention of assets of a registered investment corporation 11 Consultation to any other business operator with regard to a business assignment, merger, company split, share exchange or share transfer, or intermediation for these matters 12 Consultation to any other business operator with regard to management 13 Sale and purchase of currencies and other assets designated by a Cabinet Order as being related to Derivative Transactions (excluding Transactions of Securities-Related Derivatives) or intermediary ("Baikai"), brokerage ("Toritsugi") or agency service ("Dairi") thereof 14 Sale and purchase of negotiable deposits and other monetary claims (excluding those that fall under the category of Securities), or intermediary ("Baikai"), brokerage ("Toritsugi") or agency service ("Dairi") thereof 8. Addresses of Head Office and Other Branches As of December 31, 2017 Category Address Head Office 1-1, Otemachi 1-Chome, Chiyoda-ku, Tokyo Other Business Operation (1) Registered businesses conducted by the Company listed in Article 35(2) of FIEL 1 Business pertaining to transactions conducted by using fluctuations in commodity prices and other indicators, market gaps, etc. as specified by a Cabinet Office Ordinance (excluding business pertaining to transactions on a commodity market, etc. defined in Article 2(21) of the Commodity Futures Act) 2 Business pertaining to money lending business defined in Article 2(1) of the Act on Controls, etc. on Money Lending or other money loan, or intermediary service of lending and borrowing of money 3 Business pertaining to conclusion of a Loan Participation Contract, or an intermediary, brokerage or agency service 4 Goods leasing business 5 Business pertaining to creation and sale of computer programs for the business of any other business operator, and a business to accept the entrustment of computing service 6 Business of a conclusion of a contract on the acquisition or transfer of Carbon Dioxide Equivalent Quotas, or an intermediary, brokerage or agency service 7 Derivertives transactions pertaining to Carbon Dioxide Equivalent Quaotas, or an intermediary, brokerage or agency service 5

8 8 Business of concluding a contract for a guarantee or assumption of an obligation, or an intermediary, brokerage or agency service 9 Business of making an arrangement with or introducing another business operator, to customers of its Business (2) Approved Businesses conducted by the Company listed in Article 35(4) of FIEL 1 Business for intermediary, etc. of custody business, business for intermediary, etc. of fund service business and business for intermediary, etc. of foreign depositary receipt business 2 Business for intermediary business related to LNG physical trading 3 Business for maritime freight index derivative transactions including intermediary and agency thereof 10.Engaged Businesses included in the Matters Set Forth in Article 29-2(1)(VI) of FIEL and Article 7(3)(a), (3)-2, (3)-3 (a) and from (4) to (9) of the Cabinet Office Ordinance on Concerning Financial Instruments Business 1 Securities-related business 2 Sale and purchase of real estate trust beneficiary interests 11.Complaint Processing and Dispute Resolution (1) Type I Financial Instruments Business Measures to conclude a Basic Contract for Implementation of Dispute Resolution Procedure with Financial Instruments Mediation Assistance Center (hereinafter referred to as the "FINMAC") (2) Type II Financial Instruments Business Measures to utilize the Financial Futures Association of Japan (outsourcing to FINMAC) or measures to utilize Type II Financial Instruments Firms(outsourcing to FINMAC); otherwise, measures to utilize FINMAC directly as grievance procedure and dispute resolution prescribed in article 37-7(1) (ii) (b) of FIEL. (3) Investment Advisory and Agency Business Measures to utilize the Center of Tokyo Bar Association, Daiichi Tokyo Bar Association, and Diani Tokyo Bar Association as the measures for dispute resolution prescribed in article 37-7(1)(iii)(b) of FIEA Measures to publicize the business operation system and internal policy on public website of the Company. (4) Investment Management Business Not applicable (5) Money Lending Business Measures to conclude a Basic Contract for Implementation of Dispute Resolution Procedure with Japan Financial Services Association 6

9 12.Financial Instruments Firms Associations and Certified Investor Protection Organization Memberships Financial Instruments Firms Association : Japan Securities Dealers Association The Financial Futures Association of Japan Type II Financial Instruments Firms Association (Note) Utilization contract of Financial Instruments Mediation Assistance Center (Type II Financial Instruments Business) was cancelled on March 31st, Financial Instruments Exchange Memberships Tokyo Stock Exchange Osaka Exchange Nagoya Stock Exchange Tokyo Financial Exchange 14. Investor Protection Fund Membership Japan Investor Protection Fund 7

10 II Business Overview 1. Business Outline for the Current Period In the fiscal year under review, Japanese stock prices were relatively flat, despite small fluctuations, until March. However, in April the Nikkei Stock Index ( Nikkei 225 ) dropped to 18,224, which was the lowest in 2017, reflecting market participants' vigilance against the outcome of French national election, concerns on the Trump administration and heightened geopolitical risks in North Korea. Afterwards, the market returned to an upward trend with the expectation of solid corporate performance. Although, Japanese stock prices briefly dropped during summer due to heightened concern on North Korea, Japan market marked a record rise with a 16-day bull run in October, following the strong performance of the ruling government in parliamentary elections in Japan and rise in U.S. stock prices. Subsequently, in November as US stock market continued its rising trend and Japanese Yen depreciated against the US dollar, Nikkei 225 recorded a 26-year high, since Jan 1992, at 23,382. At the end of the 2017 fiscal year, the Nikkei 225 stood at 22,764 and the Tokyo Stock Price Index (TOPIX) stood at 1,817, which were up 3,650 and 299 respectively compared to the previous 2016 fiscal year end. In the Japanese bond market, 10-year JGBs yields started the year with an upward (prices decreased) trend following the rise in U.S. interest rate driven by the outcome of the US president election and rose to positive rates, and temporarily marked over 0.1 percent in February. However, the Bank of Japan s ( BOJ ) yield curve control framework has suppressed the rise in 10-year JGBs yields. In April, amid an economic slowdown in U.S. and heightened geopolitical risks, 10-year JGBs yields temporarily declined (prices increased) to around 0 percent. Subsequently rising global interest rates led to a rise in 10-year JGBs yields (prices decreased) to over 0.1 percent in July. However, yields declined (prices increased) to negative range again in September following BOJ s 2nd "outright purchases of JGBs", increasing concern on North Korea and a decline in U.S. interest rate. 10-year JGBs yields then moved relatively flat towards the year-end and marked at 0.05% at the end of In foreign exchange markets, the yen started the year with a depreciation trend against US dollar, moving within the range of Subsequently, following increasing uncertainty around the Trump administration s policies, the yen started to appreciate moderately against dollar, although, there were several factors pointing to appreciation of the dollar such as solid U.S. economy and U.S. interest rate hikes by FRB. The yen strengthened against the dollar under normalization of U.S. monetary policy and has remained in the range of against the dollar. The yen closed the year 2017 at the 112 level against the dollar. The yen appreciated against the euro from the beginning of 2017 reflecting uncertainties regarding national elections and politics in Europe and strengthened up to 115 yen against the euro in April. Following the results of French Presidential Elections and the abatement of political uncertainties in Europe and speculation about a reduction in monetary accommodation by the ECB has caused a sharp depreciation of the yen. The yen closed the year 2017 at the 135 level against the euro. Operating revenue totaled 56.2 billion yen, and Operating revenue, net of interest expense, amounted to 47.1 billion yen. Selling, general and administrative expenses totaled 40.3 billion yen, the operating income amounted to 6.7 billion yen and the ordinary income including non-operating income and expenses amounted to 6.9 billion yen. The net income before income tax amounted to 8.1 billion yen and the net income amounted to 4.4 billion yen with extraordinary income and loss and income taxes. Summaries by accounts are as follows. 8

11 (1) Commission received Commission received was 43.8 billion yen. The following is the breakdown by category. 1 Brokerage commissions Brokerage commissions were 12.8 billion yen. Equity trading volume was 27,228.3 billion yen. Brokerage commissions on equities were 12.5 billion yen and brokerage commissions on JGB futures and ETFs totaled 0.2 billion yen. 2 Underwriting and selling commissions Underwriting and selling commissions were 0.4 billion yen. 3 Subscription and distribution commissions There was no subscription and distribution commissions in the current fiscal year. 4 Other commissions Other commissions were 30.5 billion yen. (2) Net trading income Net trading income recorded 1.7 billion yen. Trading gain related to equities was 0.3 billion yen. Trading loss related to bonds was 0.1 billion yen and trading gain related to foreign exchange and other were 1.6 billion yen. (3) Interest revenue and expenses Net interest revenue and expenses were 1.5 billion yen income. (4) Selling, general and administrative expenses Selling, general and administrative expenses were 40.3 billion yen. (5) Non-operating income and expenses Net non-operating income was 0.1 billion yen, mainly due to revaluation gain generated from assets and liabilities in foreign currencies. (6) Extraordinary income and loss Extraordinary income included 3.0 billion yen of gain on forgiveness of debts on consolidated tax payable. Extraordinary loss was 1.8 billion yen mainly comprised of 1.1 billion yen from restructuring loss, 0.5 billion yen from loss on early redemption of loan and 0.1 billion yen provision for reserve for financial products transaction liabilities. (7) Income taxes Net income before income taxes amounted to 8.1 billion yen. Income taxes-current amounted to 3.8 billion yen and income taxes-deferred amounted to a benefit of 0.08 billion yen. 9

12 2.Key Financial Data (1) Overall Operating Results (Millions of Yen) FY 2015 FY 2016 ( 9 months ) FY 2017 Capital stock 96,307 96,307 96,307 Total number of issued shares (thousands) Operating revenue (Commission received) ((Brokerage commissions)) ((Underwriting & selling commissions)) ((Other commissions)) (Net trading income) ((Equities and other)) ((Bonds)) ((Foreign exchange and other)) (Financial revenue) Financial expenses Operating revenue, net of interest expense Ordinary income Net income 3,842 3,842 3,842 58,111 36,818 56,268 50,680 30,539 43,834 21,093 9,766 12, ,868 20,388 30,584 4,453 4,327 1, , (144) (17,626) 3,488 1,619 2,977 1,951 10,647 2,985 1,834 9,132 55,126 34,984 47,135 14,799 5,052 6,924 8,309 12,092 4,404 (2) Trading and underwriting volume in securities 1 Equity Trading Activity (Millions of Yen) FY 2015 FY 2016 ( 9 months ) FY 2017 Brokerage Proprietary Total 25,878,946 17,231,237 27,228,312 7,839,577 6,774,643 9,949,256 33,718,523 24,005,880 37,177,569 10

13 2 Underwriting, offering and solicitation for selling and others for professional investors, and subscription placement, offering placement, private placement and solicitation for placement for professional investors (Millions of Yen) Type Underwriting Offering Total sales solicitation to professional investors Subscription Placement Offering Placement Private Placement Placement solicitation to professional investors FY 2015 FY 2016 ( 9 months) FY 2017 Stocks 1, , JGBs Municipal bonds 35,600 35, Special bonds 36, , Corporate bonds 83,600-21,200 66,900-1,200 60,300 Total 155,900-21, ,200-1,200 60,300 Bonds Beneficiary certificate ,891 - Other Stocks , JGBs Municipal bonds 22,604 22, Special bonds 216, , Corporate bonds 30, , Total 269, , Beneficiary certificate ,954 - Other Stocks 1, JGBs Municipal bonds 18,082 18, Special bonds 124, , Corporate bonds 42, , Total 185, , Beneficiary certificate ,416 - Other Bonds Bonds (3) Other business activities The Businesses listed in Article 35(2) and (4) of FIEL have been omitted in consideration of financial statements impact. (4) Regulatory capital adequacy ratio (Millions of Yen) FY 2015 FY 2016 FY 2017 Net capital ratio ( A / B X 100 ) 371.6% 411.1% 398.0% Net capital ( A ) 180, , ,840 Risk total ( B ) 48,457 46,313 48,948 Market risk 20,003 19,749 22,904 Counterparty risk 18,503 15,890 15,085 Basic risk 9,950 10,673 10,958 (5) Number of employees and registered sales representatives FY 2015 FY 2016 FY 2017 Employees (Registered sales representatives ) ( 250 ) ( 266 ) ( 263 ) 11

14 III Financial Matters 1. Financial Information (1) Statement of financial condition Account (Millions of Yen) Previous fiscal year Current fiscal year ( As of December 31, 2016 ) ( As of December 31, 2017 ) ( ASSETS ) Current assets 1,907,445 1,858,226 Cash and deposits 164, ,733 Cash segregated as deposits 38,268 10,196 Trading products 519, ,228 Trading securities and other 309, ,800 Derivatives 210, ,428 Trade date accrual - 1,130 Margin transaction assets - 9,395 Cash collateral pledged for securities borrowing on margin transactions - 9,395 Loans secured by securities 936,912 1,132,644 Cash collateral pledged for securities borrowed 465, ,259 Loans on Gensaki transactions 471, ,384 Advance paid Short-term guarantee deposits 240, ,364 Accounts receivable Accrued income 3,879 5,216 Deferred tax assets 3,175 3,279 Others Allowance for doubtful accounts (1) - Noncurrent assets 3,073 3,651 Property, plant and equipment 0 4 Furniture & fixtures 0 4 Intangible assets Software 0 22 Others Investments and other assets 3,031 3,483 Investment securities Long-term loans receivable Long-term guarantee deposits 1,111 1,359 Long-term prepaid expenses - 41 Deferred tax assets Others Total Assets 1,910,518 1,861,878 12

15 Account Previous fiscal year (Millions of Yen) Current fiscal year ( As of December 31, 2016 ) ( As of December 31, 2017 ) ( LIABILITIES ) Current liabilities 1,646,177 1,646,534 Trading products 637, ,456 Trading securities and other 424, ,843 Derivatives 213, ,613 Trade date accrual 22,513 - Margin transaction liabilities - 9,223 Cash collateral received for securities lending on margin transactions - 9,223 Loans payable secured by securities 732,481 1,142,894 Cash received on debt credit transaction of securities 41, ,460 Borrowings on Gensaki transactions 691,377 1,002,433 Deposits received 269 5,969 Guarantee deposits received 159, ,635 Variation margin received ,231 Short-term loans payable 80,000 74,000 Accounts payable Accrued expenses 5,119 5,704 Income taxes payable Reserve for bonuses 4,452 4,970 Others 2,859 3,449 Noncurrent liabilities 94,706 40,672 Bonds payable 3,600 2,600 Long-term loans payable 81,500 28,000 Reserve for retirement benefits 3,773 9,409 Others 5, Reserves under the special laws Reserve for financial products transaction liabilities 2,463 2,585 2,463 2,585 Total Liabilities 1,743,346 1,689,791 ( NET ASSETS ) Shareholders' equity 172, ,773 Capital stock 96,307 96,307 Capital surplus 55,660 55,660 Legal capital surplus 55,660 55,660 Retained earnings/ (deficits) 20,401 24,805 Other retained earnings/ (deficits) 20,401 24,805 Retained earnings brought forward 20,401 24,805 Valuation and translation adjustments (5,197) (4,687) Deferred net gain/ (loss) on hedges (5,197) (4,687) Total Net Assets 167, ,086 Total Liabilities and Net Assets 1,910,518 1,861,878 13

16 (2) Statement of operations (Millions of Yen) Account Operating revenue Commission received Net trading income Financial revenue Financial expenses Previous fiscal year Current fiscal year from April 1, 2016 from January 1, 2017 ( ) ( to December 31, 2017 ) to December 31, ,818 56,268 30,539 43,834 4,327 1,786 1,951 10,647 1,834 9,132 Operating revenue, net of interest expense 34,984 47,135 Selling, general and administrative expenses Trade-related expenses Compensation Occupancy Administrative expenses Depreciation Taxes Others 29,972 40,382 6,091 7,915 13,086 17,928 4,226 6,220 4,605 6, ,035 1, Operating income 5,012 6,752 Non-operating income Non-operating expenses Ordinary income 5,052 6,924 Extraordinary income Gain on forgiveness of debts on consolidated tax payable Reversal of reserve for financial products transaction liabilities Extraordinary loss Restructuring loss Loss on early redemption of loan Reserve for financial products transaction liabilities Loss on disposal of fixed assets 6,170 3,093 6,168 3, , , Net income before income taxes 10,928 8,178 Income taxes - current Income taxes - deferred 2,455 3,855 (3,618) (81) Net income 12,092 4,404 14

17 (3) Statement of changes in net assets FY 2016 (from April 1, 2016 to December 31, 2016) Shareholders' equity Capital surplus Retained earnings Valuation and translation adjustments (Millions of Yen) Capital stock Legal capital surplus Other retained earnings Retained earnings brought forward Total shareholder's equity Deferred net gain / (loss) on hedges Total net assets Beginning balance Changes of items during the fiscal year 96,307 55,660 8, ,277 (5,463) 154,813 Net income ,092 12,092-12,092 Net changes of net assets other than shareholders' equity Total changes of items during the fiscal year ,092 12, ,358 Closing balance 96,307 55,660 20, ,369 (5,197) 167,172 FY 2017 (from January 1, 2017 to December 31, 2017) Shareholders' equity Capital surplus Retained earnings Valuation and translation adjustments (Millions of Yen) Capital stock Legal capital surplus Other retained earnings Retained earnings brought forward Total shareholder's equity Deferred net gain / (loss) on hedges Total net assets Beginning balance Changes of items during the fiscal year 96,307 55,660 20, ,369 (5,197) 167,172 Net income - - 4,404 4,404-4,404 Net changes of net assets other than shareholders' equity Total changes of items during the fiscal year - - 4,404 4, ,914 Closing balance 96,307 55,660 24, ,773 (4,687) 172,086 15

18 (4) Notes to the financial statements 1 Notes to statement of financial condition 1) Assets pledged as collateral and collateralized liabilities (Millions of Yen) (Millions of Yen) Assets pledged as collateral FY2016 FY2017 Trading products 46,192 4,000 (Note) In addition to the above, following assets are pledged as collateral. FY2016 Securities borrowed of 20,661 million yen were used as collateral for short-term loans payable. Trading products of 150 million yen were used as collateral for short-term borrowed securities. Trading products of 1,996 million yen were pledged as collateral in lieu of guarantee deposits for listed futures transactions. Trading products of 7,856 million yen and securities borrowed of 529 million yen were pledged as collateral with Japan Securities Clearing Corporation, Tokyo Financial Exchange, etc. FY2017 Securities borrowed of 1,466 million yen were used as collateral for short-term loans payable. Trading products of 1,239 million yen were used as collateral for short-term borrowed securities. Trading products of 8,390 million yen and securities borrowed of 6,743 million yen were pledged as collateral with Japan Securities Clearing Corporation, Tokyo Financial Exchange, etc. (Millions of Yen) (Millions of Yen) Collateralized liabilities FY2016 FY2017 Short-term loans payable 65,000 5,000 2) Collateralized securities (Millions of Yen) (Millions of Yen) Securities pledged out FY2016 FY2017 Securities loaned to customers for margin transactions Securities loaned as collateral under financing agreements Securities pledged related to securities sold under Gensaki transactions Securities pledged as margin Securities pledged as collateral for other transactions - 9,496 98, , ,196 1,032,474 4,190 12,890 73,196 8,950 (Millions of Yen) (Millions of Yen) Securities received in FY2016 FY2017 Securities borrowed on margin transactions Securities borrowed under financing agreements Securities received related to securities purchased under Gensaki transactions - 9, ,797 1,065, , ,956 (Millions of Yen) (Millions of Yen) 3) Accumulated depreciation of property, plant and equipment FY2016 FY

19 (Millions of Yen) (Millions of Yen) 4) Monetary claims from the affiliates and monetary debts to the affiliates FY2016 FY2017y Short-term monetary claims from the affiliates Short-term monetary debts to the affiliates 11,052 56,182 Long-term monetary debts to the affiliates 20,541 12,570 2 Notes to statement of operations 1) Volume of transactions with the affiliates Operating transactions (Millions of Yen) (Millions of Yen) FY2016 FY2017y (9 months) Operating revenue from the affiliates 339 1,584 Operating expenses to the affiliates Other than Operating transactions 6,168 3,093 2) Extraordinary income FY2016 ( 9 months) 6,168 million yen is recorded in Extraordinary income, as the individually attributed amount of consolidated corporation tax payable and consolidated local corporate tax payable of the Company were forgiven by the parent company of consolidated tax group. FY2017 3,093 million yen is recorded in Extraordinary income, as the individually attributed amount of consolidated corporation tax payable and consolidated local corporate tax payable of the Company were forgiven by the parent company of consolidated tax group. 3 Notes to statement of changes in net assets 1) Outstanding shares (FY2016) (Unit: shares) Types of shares Number at the beginning of the fiscal year Number increased Number decreased Number at the end of the fiscal year Common stock 3,842, ,842,000 (FY2017) (Unit: shares) Types of shares Number at the beginning of the fiscal year Number increased Number decreased Number at the end of the fiscal year Common stock 3,842, ,842,000 17

20 2. Major Lenders and Borrowings Lender FY2016 Balance at the end of the fiscal year Lender FY2017 (Millions of Yen) Balance at the end of the fiscal year Bank of Japan 65,000 Citicorp LLC 55,000 Short-term Citigroup Japan Holdings G.K. 10,000 Citigroup Financial Products Inc. 8,000 Bank of Japan 5,000 Long-term Citigroup Financial Products Inc. 59,000 Citigroup Financial Products Inc. 16,000 Citigroup Japan Holdings G.K. 20,000 Citigroup Japan Holdings G.K. 12, Securities Held (Non-Trading) Current assets Equities Book Value FY2016 Fair Value Unrealized gain/ (loss) Book Value FY2017 Fair Value (Millions of Yen) Unrealized gain/ (loss) Bonds Others Noncurrent assets Equities Bonds Others Derivative Transactions (Non-Trading) (Millions of Yen) Transaction type Interest rate swap on long-term cash collateral pledged for bonds borrowed Notional amount FY2016 Fair value Asset (Liability) Unrealized gain/ (loss) Notional amount FY2017 Fair value Asset (Liability) Unrealized gain/ (loss) 43,000 (5,276) (5,276) 36,000 (4,718) (4,718) 18

21 5. External Audit Pursuant to the Article 436(2) (i) of the Companies Act, the Company s financial report and its supplementary schedules were audited by KPMG AZSA LLC. And the Company received audit report with unqualified opinion from KPMG AZSA LLC. 6. Others Change in fiscal year Based on the resolution of the general meeting of shareholders on June 27, 2016, the Company changed the fiscal year-end from March 31 to December 31. As a transitional period, the accounting period of the previous fiscal year is the 9 months from April 1, 2016 to December 31,

22 IV Internal Control Structure 1. Overview of Internal Control The Company has the following divisions and departments which are responsible for internal control of the Company. Legal Division Legal Division consists of Legal Department and Derivatives Documentation Group and has, in connection with general legal affairs and various laws and regulations and miscellaneous rules relating to financial instruments transactions, the duty to have the officers and employees of the Company abide by the foregoing or give advice to them on such matters, as the case may be. Compliance Division Compliance Division consists of Markets Compliance, Surveillance, Central Compliance, AML Compliance, Banking & Research Compliance / Control Group and ICRM Compliance Assurance Units. The Division is seen as a key advocate within Citi of "Responsible Finance". This is accomplished by the following: Setting standards through the creation and maintenance of Compliance policies and embedding the required standards into the business and operation of the company Managing the regulatory environment by tracking Japanese and overseas regulatory developments and active participation in industry organizations Providing advisory and support to other divisions to promote appropriate business behavior and activity that is consistent with the required standards Conducting testing and surveillance to evaluate compliance with policies and regulations Promoting appropriate risk management and governance through the development of procedures and systems to comply with applicable laws and regulations Providing live and on-line trainings to increase understanding of employees regarding key laws, regulations and policies Risk Management Division Risk Management Division consists of Credit Risk Management, Market Risk Management, UDCS-NPAC, Underwriting Review, Risk Analytics, Operational Risk Management and Risk Governance Units. The Division is responsible for tracking credit status, management of markets risks, oversight of new products, underwriting review, analysis/establishment of internal risk models including research / development/ governance process, management of risk operational risks and preparations/management of risk related reports. Finance Division Finance Division consists of Regulatory Reporting, Treasury, Product Control and Financial Planning & Analysis and Tax Units. The Division is responsible for production, maintenance, and management of ledgers/ reports, etc. of the Company's finance, accounting and tax, risk management based on the Company's Capital Adequacy Ratio, liquidity analysis, fund raising, fund management and planning of management accounting and budget of the Company. Corporate Planning Division The Corporate Planning Division is responsible for the matters related to corporate planning of the Company, the matters related to assistance to President of the Company and the matters related to handling orders, etc. from authorities, etc. 20

23 Corporate Affairs Division The Corporate Affairs Division is responsible for the planning and execution of communications and public affairs programs designed to strengthen the Company's recognition, enhance its brand and protect its reputation and also responsible for the promotion of the Company's CSR activities. O&T Planning Unit (under Operations and Technology Division) The O&T Planning Unit is responsible for the matters concerning risk management around information security, personal information protection, business continuity risk, system risk management, record management and outsourcing management. Information Technology Department The Information Technology Department is responsible for development of Company s information technology strategies, systems development, systems operations and maintenance, associated expense and project management, and overall system risk management activities. Government Affairs The Government Affairs is responsible for information gathering, research and analysis for the Company on government policies/activities as well as consultancy and advisory regarding relationship management with government agencies. It is also responsible for engagement in activities of business associations which the Company is involved in. Markets Operations Department (excluding CMO Support Unit) The Markets Operations Department consists of Cash Management, Information Service Group, Risk& Control, Foreign Securities Operations, Domestic Securities Operations, Exchange Trade Derivatives Operations, OTC Derivatives Operations, Okinawa Operations, KYC Utility, FX& Treasury Operations, Middle Office and CMO Support Units (CMO Support Unit is excluded from Internal Control Function). The Division is responsible for matters related to settlement of financial products trades, etc. with Japanese and foreign customers. The Company also has established the below division which directly report to Board of Directors. Internal Audit Division The Division conducts internal audits on the business of the Company and reports their results and evaluations to the Board of Directors. 21

24 2. Condition of Customers' Assets Segregation We have managed deposited cash and securities to secure and orderly stored them separately from our own property. Thus, even in the event of bankruptcy, deposited money and securities are refunded to customers under certainty. Asset segregation balance of cash and securities, and type of storage condition of the securities or the amount or quantity of securities at the end of December 2016 and December 2017 are as follows. (1) Asset segregation based on article 43-2 of FIEL 1 Condition of trust funds (Millions of Yen) Type As of December 31, 2016 As of December 31, 2017 Required segregation of customers cash deposits at the latest calculation date Funds entrusted for segregated customers' cash deposits at the end of the fiscal year Required segregation of cash deposits at the end of the fiscal year 2,944 9,141 38,247 10, ,734 2 Condition of securities segregation A. Securities for safe keeping Security Type As of December 31, 2016 As of December 31, 2017 Domestic securities Foreign securities Domestic securities Foreign securities Equities (shares) 989,951 thousand 8,960,445 thousand 785,142 thousand shares shares shares 9,019,961 Bonds (face amount) millions of millions of 303,881 1,041, ,646 millions yen yen of yen 998,885 Beneficiary certificates 83,310 million 152,086 million 146,106 million (number of accounts) accounts accounts accounts 153,344 Stock purchase warrants (number of units) - units 24 units - units - units thousand shares millions of yen million accounts B. Securities received as collateral B. Not applicable 22

25 C. Condition of securities segregation 1. Security Type Convertible bond-type corporate bonds with stock acquisition rights, equity securities of investment corporations, beneficiary securities and investment securities that are listed on financial instruments exchange markets 2. Domestically listed foreign securities 3. Corporate debt securities, stocks etc. handled at book-entry system under the transfer law Depositary agent and segregation method 1 With respect to CB-type corporate bonds with stock acquisition rights (including CB certificates, the same shall apply hereinafter), equity securities of investment corporations, beneficiary certificates and investment securities that are listed on Financial Instruments Exchange Markets (the hereinafter referred to as the Domestically Listed Securities ), those securities that are the assets of the Company and the other securities that are not Customer-owned Securities (hereinafter referred to as "Company-owned Securities"), in principle, shall be managed separately from Customer-owned Securities by means of a ledger, etc., but stored together at Japan Securities Depository Center (hereinafter referred to as the "Depository", including the organization that is entrusted by the Depositary, the same shall apply hereinafter). 2 Customer-owned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified by means of the Company s ledger, etc.; provided, however, that Domestically Listed Securities that are not redeposited in the Depository at the customer s request shall be stored in Japan Information Processing, Ltd. or any other outside place of custody clearly segregated from Company-owned Securities and managed in a manner whereby the customer to whom the particular securities belong can be immediately identified. Customer-owned Securities that have been delivered to the issuing company (including the transfer agent; the same shall apply hereinafter) for the exercise of stock acquisition rights of CB-type corporate bonds with stock acquisition rights etc. at the request of a customer shall be managed appropriately by means of the Company s ledger, etc., in a manner whereby the issue, the amount and the issuing party of the particular securities can be immediately identified for each commissioning customer. With respect to domestically listed foreign securities, Company-owned Securities and Customer-owned Securities, in principle, shall be managed separately by means of a ledger, etc. but stored together at Depository. Customer-owned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified by means of the Company s ledger, etc. 1 The Japanese Government Bonds shall be managed at the Bank of Japan pursuant to the Transfer Law in a manner whereby Company-owned Securities etc. and Customer-owned Securities are clearly segregated and, with respect to Customer-owned Securities, the holdings of each customer can be immediately identified by means of the Company s ledger of the book-entry accounts. 2 The corporate debt securities stocks etc.(excluding JGBs described in 1 above) shall be managed at the Depository pursuant to the Transfer Law in a manner whereby Company-owned Securities etc. and Customer-owned Securities are clearly segregated and, with respect to Customer-owned Securities, the holdings of each customer can be immediately identified by means of the Company s ledger of book-entry accounts. 4. Domestic bonds other than CB-type corporate bonds with stock acquisition rights and securities set forth in section 3 above, and stock acquisition rights securities, etc. In principle, these securities shall be stored in Japan Information Processing, Ltd. or any other outside place of custody where Company-owned Securities, etc., and Customer-owned Securities are clearly segregated and managed in a manner whereby the holdings of each customer can be immediately identified by means of the Company s ledger, etc. However, in the case of securities of large denomination, etc., where a single certificate is held in common by the Company and the customer, and it is not possible to clearly segregate the place of custody of Company-owned portion etc. and Customer-owned portion, the place of custody shall be made clear and Company-owned portion etc. and Customer-owned portion shall be segregated by means of the Company s ledger, etc. and Customer-owned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified. 23

26 5. 6. Security Type Beneficiary certificates of investment trust Securities stored or managed at overseas custodial facilities Depositary agent and segregation method With respect to domestic Beneficiary certificates of investment trust, in principle, these certificates shall be stored together at the Depository. In such a case, the place of custody of Company-owned Securities, etc. and Customer-owned Securities shall be clearly segregated at said trustee trust bank and Customerowned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified by means of the Company s ledger, etc. However, in the case where a single certificate is held in common by the Company and the customer, and it is not possible to clearly segregate the place of custody of Company-owned portion etc. and Customer-owned portion, the place of custody shall be made clear and Company-owned portion etc. and Customer-owned portion shall be segregated by means of the Company s ledger etc. and Customer-owned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified. With respect to foreign Beneficiary certificates of investment trust, in principle, these certificates shall be managed clearly as Customer-owned Securities at an overseas Agency's facility and Customer-owned Securities shall be managed in a manner whereby the state of such management of Customer-owned Securities at the Agency can be immediately available and identified by means of the Company s ledger. With respect to the securities stored or managed at an overseas Custodial Facility, Company-owned Securities and Customer-owned Securities shall be segregated by establishing separate accounts, etc. as shown in the chart below, and Customerowned Securities shall be managed in a manner whereby the holdings of each customer can be immediately identified by means of the Company s ledger, etc.; provided, however, that in the case it is not possible to store or manage Customerowned Securities at the Custodial Facility in a manner whereby the holdings of each customer can be immediately identified, the Company shall manage these securities by means of the Company s ledger in such a way that the Company-owned portion and the Customer-owned portion is segregated and the holdings of each customer can be immediately identified. [Overview of overseas custody] Name of custodial facility Country of establishment Type of securities deposited Existence of segregated accounts and method of segregation Euroclear Citibank (Hong Kong) Ltd. Belgium Hong Kong Australian bonds, Italy national bonds, UK bonds, UK stocks, etc. Hong Kong stocks, Thailand stocks, etc. Separate accounts have been established for Company-owned Securities and customer-owned Securities at each custodial facility, and the securities for the customers account is on a commingle basis. Citigroup Global Markets Inc. USA Separate accounts have been US stocks, established for Company-owned Canadian stocks, Securities and customer-owned US bonds, Securities at each custodial facility, Canadian bonds, etc. and the securities for the customers account is on a separate basis. 3 Condition of asset segregation for Over-the-Counter Transactions of subject Securities-Related Derivatives Not applicable 24

27 (2) Asset segregation based on article of FIEL Not applicable (3) Asset segregation based on article 43-3 of FIEL Not applicable 25

28 V Status of Consolidated Subsidiaries, etc. The Company has no subsidiary and affiliate provided by the Regulation for Terminology, Forms and Preparation of Consolidated Financial Statements (Ordinance of the Finance Ministry No. 28 of 1976), article 2(3) and (7), respectively. End 26