[Disclosure Booklet]

Transcription

1 <Translation> [Disclosure Booklet] Explanatory Documents on the Status of Business and Property for the fiscal year ended Dec 31, 2016 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 opens Tokyo Representative Office 1977 Salomon Brothers Asia Limited established in Hong Kong 1980 Salomon Brothers Asia International opens Tokyo Representative Office Smith Barney Tokyo Representative Office becomes Tokyo Branch 1982 Salomon Brothers Asia Limited receives approval for opening its branch in Tokyo Begin operation in Tokyo Branch and moves its operation to Tokyo from Hong Kong 1987 Obtain remote membership of Osaka Securities Exchange 1988 Begin business in Tokyo Stock Exchange as an official member Begin futures trading as a remote member of Osaka Securities Exchange 1989 Become "standing underwriting manager" for JGB syndicate Begin option trading as a remote member of Osaka Securities Exchange Begin business in Tokyo International Financial Futures Exchange as a clearing member Begin business in Nagoya Stock Exchange as a special participant 1991 Begin business in Osaka Securities Exchange as an official member 1997 Salomon Brothers Asia Limited Tokyo Branch (A Cayman Entity)begins its operation 1998 Salomon Brothers Asia Limited acquires all operations of Smith Barney's Tokyo Branch and renamed to Salomon Smith Barney (Japan) Limited 1999 Acquires investment banking, wholesale, and research divisions from Nikko Securities Co., Ltd. and renamed to Nikko Salomon Smith Barney Limited Begin operation in Nagoya Branch Begin business in Nagoya Stock Exchange as an official member 2003 Rename to Nikko Citigroup Limited Establish Nikko Citigroup Limited Preparatory Company as its subsidiary Nikko Citigroup Limited Preparatory Company acquires all business from Nikko Citigroup Limited (A Cayman Entity) and renames to Nikko Citigroup Limited 2004 Begin operation as Nikko Citigroup Limited (a Japanese legal entity) Close Nagoya Branch 2007 Relocate its headquarter to Shin Marunouchi Building 2008 Establish Nikko Citi Holdings Inc. (Citigroup Japan Holdings Inc. and Nikko Cordial Group merges) Re-open Nagoya Branch 2009 Renamed to Citigroup Global Markets Japan Inc., after the sale of Nikko Cordial Securities Inc. to Sumitomo Mitsui Banking Corporation 2010 Close Osaka Branch Close Nagoya Branch 1

4 (2) Organization Chart 2

5 4. Shareholders in the Top 10, Number of Shares Held and Percentage of Voting Rights As of December31, 2016 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 As of December31, 2016 Position Name Representation executive/ non-executive Representative Director, President and CEO Luke Randell Yes executive Director, Deputy President Kuniyoshi Hayashi No executive Director, Deputy President Yusuke Asai No executive Director Akihiko Sakashita No executive Director Tatsuo Tanaka No non-executive Statutory Auditor Mamoru Sato non-executive (Note) Anthony P. Della Pietra, Jr. assumed the office of Representative Director, CEO on April 1, Luke Randell assumed the office of Representative Director, President on April 1, Tatsuo Tanaka assumed the office of Director, Chairman on April 1, 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 December31, 2016 Name Title Akihiko Sakashita Director, Chief Administrative Officer, Chief Internal Control Officer Robert Itsuo Nakamura Head of Multi-Asset Group Daisaku Fujikawa Head of Capital Markets Origination Fumito Okuyama Head of Financial Institution Relationship Management Akimoto Kawamura General Counsel Ayumi Tomoda Head of Operations Joel Fasternberg Head of Human Resources Matt van Weezel Head of Compliance Division, Deputy Chief Internal Control Officer (Note) The registration has been replaced on April 1, 2017 as shown below. Koichi Tanaka Head of Compliance Division, Chief Internal Control Officer Akimoto Kawamura General Counsel Matt van Weezel Deputy Head of Compliance Division, Deputy Chief Internal Control Officer (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 Transactions (excluding sale and purchase of Securities falling under Article 2(8) (x) of FIEL) (ii) 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) 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 4

7 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, 2016 Category Address Head Office 5-1, Marunouchi 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 (Note) Business for Bank Agency Service has been discontinued on September 30, (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 Not applicable (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 Certified Investor Protection Organization : Financial Instruments Mediation Assistance Center (Type II Financial Instruments Business) 13.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 During the fiscal year under review, Japanese stock prices had been relatively flat accompanying with small fluctuation until early June. When a majority of voters in the United Kingdom chose to leave the European Union at a referendum, the Nikkei Stock Index ( Nikkei225 ) made a sudden drop with concern in the future economy of Europe. And the Nikkei Stock Index reached 14,864 on June 24, which was the lowest since October The consumption tax increase was decided to postpone. As ruling party in the election for House of Councilors was overwhelming, the expectation to a policy increased. Backed by those, the market turned to a rising trend. In October, Nikkei225 recovered to 17,000 reflecting factors such as the rise in U.S. and European interest rates and the further depreciation of the yen against the dollar. In November following Trump s victory in the U.S. presidential election, Subsequently, Japanese stock prices temporarily dropped sharply. But US stock market turned to raising trend since investors expected that market might benefit under coming Trump s policies and deregulation. Japanese stock prices followed this rising trend toward the end of 2016 with the expectation of favorable corporate performance of Japanese firms under the depreciation of Yen against the dollar. As a result, Nikkei225 marked 19,592 in December, which was the highest in the fiscal year. At the end of this fiscal year, the Nikkei stood at 19,114 and the Tokyo Stock Price Index (TOPIX) stood at 1,518, which was 2,356 and 171 higher, respectively from the fiscal year end of March In the Japanese bond market, 10-year JGBs yields started within the negative range under the Bank of Japan ( BOJ ) negative interest rate policy. Based on the observation that BOJ might expand the negative interest rate range or the concerns on the future economy of Europe impacted by the U.K referendum result, the yields on 10-year JGBs temporarily declined (prices increased) to around minus 0.3 percent in June. However, Japan negative interest rate was not lowered at BOJ s Monetary Policy Meeting in July. As interest rate rose globally based on the observation of early rise in US interest rates, 10-year JGBs yield rose as well. At the September Monetary Policy Meeting, BOJ decided to introduce QQE (Quantitative and Qualitative Monetary Easing with Yield Curve Control). As the result, the market calmed down and 10-year JGBs yields moved relatively flat during October. In November, long-term JGB yields instantly rose (prices decreased) to positive range reflecting the rise in U.S. interest rate due to the result of the US president election. At the end of this fiscal year, 10-year JGBs yield marked at 0.04%. In foreign exchange markets, the yen appreciated against the dollar since demand for the yen as a safe haven currency strengthened following increasing uncertainty of emerging countries economy. It reached 99 levels against the U.S. dollar in June and remained in a high range towards autumn. In November following Trump s victory in the U.S. president election, U.S. interest rate hiked reflecting expectation for further expansionary and fiscal policy. This caused a sharp depreciation of the yen and it temporarily reached 118 against the dollar. The yen appreciated against the euro from the beginning of the fiscal year impacted by increasing political risk in Europe such as U.K referendum. The yen temporarily appreciated to 110 against the euro in July based on Brexit or the BOJ s Monetary Policy Meeting result. It moved within a narrow range until autumn. However it depreciated against the euro following a lower interest rate under BOJ QQE (yield curve control) and reached 124 against the euro in December. The yen closed at the 116 and 122 levels against the dollar and the euro, respectively. 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 current fiscal year is the 9 months from April 1, 2016 to December 31, Operating revenue totaled 36.8 billion yen, and Operating revenue, net of interest expense, amounted to 34.9 billion yen. Selling, general and administrative expenses totaled 29.9 billion yen, the operating income amounted to 5.0 billion yen and the ordinary income including non-operating income and expenses amounted to 5.0 billion yen. The net income before income tax amounted to 10.9 billion yen and the net income amounted to 12.0 billion yen with extraordinary income and loss and income taxes. Summaries by accounts are as follows. 8

11 (1) Commission received Commission received was 30.5 billion yen. The following is the breakdown by category. 1 Brokerage commissions Brokerage commissions were 9.7 billion yen. Equity trading volume was 17,231.2 billion yen. Brokerage commissions on equities were 9.5 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 0.3 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 20.3 billion yen. (2) Net trading income Net trading income recorded 4.3 billion yen. Trading revenue related to equities was 0.3 billion yen. Trading revenue related to bonds was 0.5 billion yen and trading revenue related to foreign exchange, etc. were 3.4 billion yen. (3) Financial revenue and expenses Net financial revenue and expenses were 0.1 billion yen income. (4) Selling, general and administrative expenses Selling, general and administrative expenses were 29.9 billion yen. (5) Non-operating income and expenses Net operating income was 0.04 billion yen, mainly due to dividends from investment securities and a revaluation gain generated from assets and liabilities in foreign currencies. (6) Extraordinary income and loss 6.1 billion yen of gain on forgiveness of debts on consolidated tax payable was recorded in extraordinary income. (7) Income taxes Income taxes amounted to net benefit of 1.1 billion yen as CGMJ restarted the recognition of deferred tax assets in the amount of 3.6 billion yen in current year. 9

12 2.Key Financial Data (1) Overall Operating Results (Millions of Yen) FY 2014 FY 2015 FY 2016 ( 9 months ) 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 52,167 58,111 36,818 43,522 50,680 30,539 19,640 21,093 9, ,310 28,868 20,388 6,499 4,453 4, ,816 21, (182) (17,626) 3,488 2,145 2,977 1,951 2,159 2,985 1,834 50,007 55,126 34,984 10,060 14,799 5,052 7,357 8,309 12,092 (2) Trading and underwriting volume in securities 1 Equity Trading Activity (Millions of Yen) FY 2014 FY 2015 FY 2016 ( 9 months ) Brokerage Proprietary Total 21,084,082 25,878,946 17,231,237 7,400,125 7,839,577 6,774,643 28,484,207 33,718,523 24,005,880 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 2014 FY 2015 FY 2016 ( 9 months) Stocks JGBs Municipal bonds 30,074 30, Special bonds 46, , Corporate bonds 112,700-1, , ,200 Total 189,274-1, , ,200 Beneficiary certificate ,030 - Other 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 Beneficiary certificate ,891 - Other Stocks , JGBs Bonds Bonds Municipal bonds 22,604 22, Special bonds 216, , Corporate bonds 30, , Total 269, , Beneficiary certificate ,954 - Other 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 2014 FY 2015 FY 2016 Net capital ratio ( A / B X 100 ) 414.6% 371.6% 411.1% Net capital ( A ) 147, , ,409 Risk total ( B ) 35,688 48,457 46,313 Market risk 9,284 20,003 19,749 Counterparty risk 16,613 18,503 15,890 Basic risk 9,790 9,950 10,673 (5) Number of employees and registered sales representatives FY 2014 FY 2015 FY 2016 Employees (Registered sales representatives ) ( 280 ) ( 250 ) ( 266 ) 11

14 III Financial Matters 1. Financial Information (1) Statement of financial condition Account Previous fiscal year Current fiscal year ( As of March 31, 2016 ) ( As of December 31, 2016 ) ( ASSETS ) Current assets 1,547,659 1,907,445 Cash and deposits 80, ,424 Cash segregated as deposits 11,369 38,268 Trading products 594, ,697 Trading securities and other 479, ,634 Derivatives 115, ,063 Loans secured by securities 676, ,912 Cash collateral pledged for securities borrowed 256, ,368 Loans on Gensaki transactions 419, ,544 Advance paid Short-term guarantee deposits 175, ,532 Variation margin paid 52 - Accounts receivable Accrued income 8,904 3,879 Deferred tax assets - 3,175 Others Allowance for doubtful accounts (2) (1) Noncurrent assets 2,812 3,073 Property, plant and equipment 0 0 Furniture & fixtures 0 0 Intangible assets 3 41 Software 3 0 Others - 41 Investments and other assets 2,809 3,031 Investment securities Long-term loans receivable Long-term guarantee deposits 1,125 1,111 Deferred tax assets Total Assets 1,550,472 1,910,518 12

15 Account ( LIABILITIES ) Previous fiscal year Current fiscal year ( As of March 31, 2016 ) ( As of December 31, 2016 ) Current liabilities 1,297,749 1,646,177 Trading products 507, ,529 Trading securities and other 396, ,014 Derivatives 111, ,514 Trade date accrual ,513 Loans payable secured by securities 547, ,481 Cash received on debt credit transaction of securities 74,700 41,104 Borrowings on Gensaki transactions 472, ,377 Deposits received Guarantee deposits received 100, ,034 Variation margin received Short-term loans payable 125,000 80,000 Current portion of bonds payable 1,700 - Income taxes payable Deferred tax liabilities 86 - Accounts payable 5, Accrued expenses 4,364 5,119 Reserve for bonuses 1,095 4,452 Others 2,622 2,859 Noncurrent liabilities 95,443 94,706 Bonds payable 3,600 3,600 Long-term loans payable 81,900 81,500 Reserve for retirement benefits 4,013 3,773 Others 5,929 5,832 Reserves under the special laws Reserve for financial products transaction liabilities 2,465 2,463 2,465 2,463 Total Liabilities 1,395,658 1,743,346 ( NET ASSETS ) Shareholders' equity 160, ,369 Capital stock 96,307 96,307 Capital surplus 55,660 55,660 Legal capital surplus 55,660 55,660 Retained earnings/ (deficits) 8,309 20,401 Other retained earnings/ (deficits) 8,309 20,401 Retained earnings brought forward 8,309 20,401 Valuation and translation adjustments (5,463) (5,197) Deferred net gain/ (loss) on hedges (5,463) (5,197) Total Net Assets 154, ,172 Total Liabilities and Net Assets 1,550,472 1,910,518 13

16 (2) Statement of operations Account Operating revenue Commission received Net trading income Financial revenue Financial expenses Previous fiscal year Current fiscal year from April 1, 2015 from April 1, 2016 ( ) ( to December 31, 2016 ) to March 31, ,111 36,818 50,680 30,539 4,453 4,327 2,977 1,951 2,985 1,834 Operating revenue, net of interest expense 55,126 34,984 Selling, general and administrative expenses Trade-related expenses Compensation Occupancy Administrative expenses Depreciation Taxes Others 40,746 29,972 8,711 6,091 16,886 13,086 6,150 4,226 6,769 4, ,027 1,035 1, Operating income 14,379 5,012 Non-operating income Non-operating expenses Ordinary income 14,799 5,052 Extraordinary income Gain on forgiveness of debts on consolidated tax payable Reversal of reserve for financial products transaction liabilities Extraordinary loss Reserve for financial products transaction liabilities Restructuring loss Litigation settlement - 6,170-6, , ,033 - Net income before income taxes 13,136 10,928 Income taxes - current Income taxes - deferred 4,883 2,455 (56) (3,618) Net income 8,309 12,092 14

17 (3) Statement of changes in net assets FY 2015 (from April 1, 2015 to March 31, 2016) Shareholders' equity Capital surplus Retained earnings Valuation and translation adjustments (Millions of Yen) Capital stock Legal capital surplus Other capital surplus Total 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 96,641-96,641 (40,981) 151,967 (4,500) 147,467 Reversal of legal capital surplus - (40,981) 40, Deficit disposition - - (40,981) (40,981) 40, Net income ,309 8,309-8,309 Net changes of net assets other than shareholders' (963) (963) equity Total changes of items during the fiscal year - (40,981) - (40,981) 49,291 8,309 (963) 7,346 Closing balance 96,307 55,660-55,660 8, ,277 (5,463) 154,813 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 capital surplus Total 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 55,660-55,660 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 55,660-55,660 20, ,369 (5,197) 167,172 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 FY2015 FY2016y Trading products 91,631 46,192 (Note) In addition to the above, following assets are pledged as collateral. FY2015 Securities borrowed of 21,072 million yen were used as collateral for short-term loans payable. Trading products of 31 million yen were used as collateral for short-term borrowed securities. Trading products of 642 million yen were pledged as collateral in lieu of guarantee deposits for listed futures transactions. Trading products of 8,781 million yen and securities borrowed of 509 million yen were pledged as collateral with Japan Securities Clearing Corporation, Tokyo Financial Exchange, etc. 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. (Millions of Yen) (Millions of Yen) Collateralized liabilities FY2015 FY2016 Short-term loans payable 110,000 65,000 2) Collateralized securities (Millions of Yen) (Millions of Yen) Securities pledged out FY2015 FY2016 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 142,820 98, , , , ,003 73,196 (Millions of Yen) (Millions of Yen) Securities received in FY2015 FY2016 Securities borrowed under financing agreements Securities received related to securities purchased under Gensaki transactions 328, , , ,371 (Millions of Yen) (Millions of Yen) 3) Accumulated depreciation of property, plant and equipment FY2015 FY

19 (Millions of Yen) (Millions of Yen) 4) Monetary claims from the affiliates and monetary debts to the affiliates FY2015 FY2016y Short-term monetary claims from the affiliates Short-term monetary debts to the affiliates 15,625 11,052 Long-term monetary debts to the affiliates 20,320 20,541 2 Notes to statement of operations (Millions of Yen) (Millions of Yen) 1) Volume of transactions with the affiliates FY2015 FY2016y ( 9 months) Operating revenue from the affiliates Operating expenses to the affiliates Other than Operating transactions - 6,168 2) Extraordinary income FY2015 Not applicable 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. 3) Extraordinary loss FY2015 1,033 million yen of the pending settlement payment is recorded in Extraordinary loss, reflecting the fact that the Company reached settlement with the plaintiffs in the US class action lawsuit with regard to the Yen LIBOR/TIBOR case. FY2016 ( 9 months) Not applicable 3 Notes to statement of changes in net assets 1) Outstanding shares (FY2015) (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 (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 17

20 2. Major Lenders and Borrowings Short-term Lender FY2015 Balance at the end of the fiscal year Lender FY2016 (Millions of Yen) Balance at the end of the fiscal year Bank of Japan 110,000 Bank of Japan 65,000 Citigroup Japan Treasury G.K. 10,000 Citigroup Japan Holdings G.K. 10,000 Long-term Citigroup Financial Products Inc. 59,000 Citigroup Financial Products Inc. 59,000 Citigroup Japan Treasury G.K. 20,000 Citigroup Japan Holdings G.K. 20, Securities Held (Non-Trading) Current assets Equities Book Value FY2015 Fair Value Unrealized gain/ (loss) Book Value FY2016 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 FY2015 Fair value Asset (Liability) Unrealized gain/ (loss) Notional amount FY2016 Fair value Asset (Liability) 73,000 (5,559) (5,559) 43,000 (5,276) Unrealized gain/ (loss) (5,276) FX forward trade on cash collateral in foreign currency pledged for bonds borrowed 19,

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 current 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. O&T and Global Functions O&T and Global Functions Division is responsible for supporting firm-wide internal control and administration and coordination among divisions and departments. Legal 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 Compliance Division consists of Markets Compliance, Surveillance, Central Compliance, AML Compliance, Banking & Research Compliance / Control Group and Compliance Testing Departments. 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 Risk Management Division consists of Credit Risk Management, Markets Risk Management, UDCS, Underwriting Review and Risk Analytics. The Division is responsible for tracking credit status, management of markets risks, oversight of new products, underwriting review, and analysis/establishment of internal risk models including research and development, governance process. Finance Finance Division consists of Regulatory Reporting, Treasury, Product Control and Financial Planning & Analysis Departments. The Division is responsible for production, maintenance, and management of legal ledgers such as the general ledger of the company's finance and accounting, tickets/vouchers, reports, etc., management of the company's assets, 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. Operational Risk Management Operational Risk Management Department is responsible for identification, assessment, monitoring, control, mitigation, and reporting of operational risks for overall business including control and management of self-assessment program conducted by each business. 20

23 Corporate Planning The Corporate Planning Department 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. Corporate Affairs 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 The O&T Planning Department is responsible for the matters concerning risk management around Operations & Technology of the franchise, specifically, Information Security, Personal Information Protection, JIMU risk, Continuity of Business, Information Technology, Record Management and outsourcing management. Operations (excluding Middle Office) The Operations Division is responsible for the matters related to settlement of financial products trades, etc. with Japanese and foreign customers. Information Technology The Information Technology Division is responsible for development of Company s information technology related strategies and control of the Company s information technology departments and functions, etc. Government Affairs The Office of 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. The Company also has established the below division which directly report to Board of Directors. Internal Audit 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 March 2016 and December 2016 are as follows. (1) Asset segregation based on article 43-2 of FIEL 1 Condition of trust funds (Millions of Yen) Type As of March 31, 2016 As of December 31, 2016 Required segregation of customers cash deposits at the latest calculation date 4,319 2,944 Funds entrusted for segregated customers' cash deposits at the end of the fiscal year 11,348 38,247 Required segregation of cash deposits at the end of the fiscal year Condition of securities segregation A. Securities for safe keeping Security Type As of March 31, 2016 As of December 31, 2016 Domestic securities Foreign securities Domestic securities Foreign securities Equities (shares) 1,231,538 thousand 8,966,469 thousand 989,951 thousand shares shares shares 8,960,445 Bonds (face amount) millions of millions of 334,728 1,050, ,881 millions yen yen of yen 1,041,242 Beneficiary certificates 45,164 million 105,443 million 83,310 million (number of accounts) accounts accounts accounts 152,086 Stock purchase warrants (number of units) - units 24 units - units 24 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, N.A. Belgium USA 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