daiwa capital markets hong kong limited · daiwa capital markets hong kong limited first addendum...

FIRST ADDENDUM TO THE BASE LISTING DOCUMENT DATED 14 FEBRUARY 2012

Daiwa Capital Markets Hong Kong Limited

First Addendum to the Base Listing Document relating toHong Kong Listed Structured Products

to be issued by

Daiwa Capital Markets Hong Kong Limited(incorporated with limited liability in Hong Kong)

Daiwa Capital Markets Hong Kong Limited (Issuer) has published this document in respect of call warrants on single equities (single equities call warrants), put warrants on single equities (single equities put warrants), call warrants on a single fund (fund call warrants), put warrants on a single fund (fund put warrants), call warrants on a single index (index call warrants), put warrants on a single index (index put warrants), call warrants on a single commodity (commodity call warrants), put warrants on a single commodity (commodity put warrants and, together with the single equities call warrants, single equities put warrants, the fund call warrants, the fund put warrants, the index call warrants, the index put warrants, the commodity call warrants, the warrants), callable contracts on a single fund (fund callable contracts), callable contracts on single equities (equity callable contracts) and callable contracts on indices (index callable contracts, and, together with the fund callable contracts and the equity callable contracts, the CBBCs) and any other structured products approved by The Stock Exchange of Hong Kong Limited (stock exchange) from time to time (such other structured products, together with the warrants and the CBBCs, being referred to as the structured products) to be issued by the Issuer in series (each, a series) from time to time and listed on the stock exchange.

Hong Kong Exchanges and Clearing Limited, The Stock Exchange of Hong Kong Limited and Hong Kong Securities Clearing Company Limited (HKSCC) take no responsibility for the contents of this document, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this document.

This document includes particulars given in compliance with the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the rules) for the purpose of giving information with regard to the Issuer. You must read this document in conjunction with our base listing document dated 15 July 2011 (as amended, supplemented or updated from time to time, base listing document). The Issuer accepts full responsibility for the accuracy of the information contained in this document and confi rms, having made all reasonable enquiries, that to the best of its knowledge and belief there are no other facts the omission of which would make any statement in this document misleading. Additional terms relating to each series of our structured products will be set out in a supplemental listing document (each, a supplemental listing document) which will be supplemental to, and should be read in conjunction with, this document and the base listing document.

The structured products involve derivatives. Investors should not invest in the structured products unless they fully understand and are willing to assume the risks associated with them.

Investors are warned that the price of the structured products may fall in value as rapidly as it may rise and holders may sustain a total loss of their investment. Prospective purchasers should therefore ensure that they understand the nature of the structured products and carefully study the risk factors set out in this document, the base listing document and the relevant supplemental listing document and, where necessary, seek professional advice, before they invest in the structured products.

The structured products constitute our general unsecured contractual obligations and are obligations of no other person and if you purchase the structured products you are relying upon the creditworthiness of the Issuer and have no rights under the structured products against, as applicable, the underlying, any company which has issued the underlying or any company which sponsors the underlying or whose securities are comprised in the underlying.

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IMPORTANT INFORMATION

If you are in any doubt as to any of the contents of this document, you should consult your stockbroker or other registered dealer in securities, bank manager, solicitor, professional accountant or other professional adviser.

What is this document about?

This document contains the updated information in relation to us and the unaudited interim report of the Issuer for the period ended 30 September 2011. This document is a supplement to our base listing document.

You should read this document together with our base listing document (as amended, supplemented or updated from time to time) and the relevant supplemental listing document (including any addendum to such supplemental listing document to be issued by us from time to time) (together, the listing documents) before investing in any structured product.

Where can you inspect the relevant documents?

We undertake during the period in which our structured products are listed on the stock exchange to make available to you for inspection at the offi ce of Daiwa Capital Markets Hong Kong Limited, which is presently at Level 26, One Pacifi c Place, 88 Queensway, Hong Kong:

(a) a copy of this document and the base listing document, together with any other addendum or successor to the base listing document (both the English version and the Chinese translation);

(b) a copy of the applicable supplemental listing document of any issue of structured products (both the English version and the Chinese translation);

(c) a copy of our latest publicly available annual report and interim report or quarterly fi nancial statements (if any); and

(d) a copy of the consent letter of the auditors from our auditors referred to in the base listing document and any addendum or successor to the base listing document (if any).

我們保證閣下可於結構性產品在聯交所上市的期間在大和資本市場香港有限公司辦事處（目前地址為香港金鐘道88號太古廣場第1期26樓）查閱下列文件：

(a) 本文件及基礎上市文件，連同基礎上市文件之任何其他增編或續編（英文版本及中文譯本）；

(b) 結構性產品的適用補充上市文件（英文版本及中文譯本）；

(c) 我們最近期公開的年報及中期報告或季度財務報表（如有）；及

(d) 基礎上市文件及基礎上市文件之任何增編或續編（如有）所述我們的核數師的同意書。

Are we regulated by any bodies under the rules?

We are regulated by the Securities and Futures Commission for the conduct of the business in dealing in securities in Hong Kong.

Have we been rated by any credit rating agency?

As at the date of this document, we are not rated by any credit rating agency.

Are we involved in any litigation?

Except as set out in the relevant supplemental listing document and in the base listing document, neither we nor any of our group companies are aware of any litigation or claims of material importance in the context of the issue of the structured products pending or threatened against us or any of our group companies.

Has there been any material adverse change?

Except as set out in this document, the relevant supplemental listing document and the base listing document, there has been no material adverse change in the fi nancial or trading positions of us or our group companies since 31 March 2011.

Where can you fi nd out information about us?

You can fi nd out more about us on the website www.hk.daiwacm.com, and on the website of the group of companies to which we belong, which is www.daiwa-grp.jp.

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TABLE OF CONTENTS

Pages

UPDATED INFORMATION ABOUT US ............................................................................................... 4

UNAUDITED INTERIM REPORT OF THE ISSUER FOR

THE PERIOD ENDED 30 SEPTEMBER 2011 .................................................................................... 13

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UPDATED INFORMATION ABOUT US

The following pages under this section shall replace the information in the section headed “INFORMATION ABOUT US” on pages 130 to 138 in our base listing document in its entirety.

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“INFORMATION ABOUT US

History

Daiwa Capital Markets Hong Kong Limited (formerly known as Daiwa Securities SMBC Hong Kong Limited) was incorporated in Hong Kong pursuant to the Companies Ordinance (Cap. 32 of the Laws of Hong Kong) with company number 22505 on 28 December 1970 with limited liability and has its registered offi ce and principal place of business at Level 26, One Pacifi c Place, 88 Queensway, Hong Kong. We became a public limited company in Hong Kong on 5 March 2010. We are a wholly owned subsidiary of Daiwa Capital Markets Asia Holding B.V., (DCMAHBV) which is in turn wholly owned by Daiwa International Holdings Inc. (DIH) whose ultimate shareholder is Daiwa Securities Group Inc. (DSGI). DSGI has been in continuous operation in the fi nancial services industry since 1902. DSGI is incorporated under Japanese law and its shares are listed on the First Section of the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange. As at 1 January 2012, the net asset value (being the difference between the total asset and total liabilities) of Daiwa Capital Markets Hong Kong Limited was US$ 452,375,994.

On 29 July 2011, DSGI announced that it approved the conclusion of a Memorandum of Understanding on the integration between Daiwa Securities Co. Ltd. and Daiwa Securities Capital Markets Co. Ltd. (DSCMC), both of which are major subsidiaries of DSGI. The integration is expected to be effected on 1 April 2012.

On 21 December 2011, DSGI announced that it approved the conclusion of the fi nal Memorandum of Understanding among DSCMC, DIH and DSGI (the MOU). Under the MOU, all ordinary shares of DCMAHBV, Daiwa Capital Markets Europe Limited and Daiwa Capital Markets America Holdings Inc. held by DSCMC were transferred to DIH on 1 January 2012. These companies and their respective subsidiaries (including the Issuer) are now operated under DSGI’s management. Investors can view further information on this on http://www.daiwa-grp.jp/data/current/press-3109-attachment.pdf.

The following is the organisation chart of Daiwa Securities Group Inc. and its subsidiaries (the Daiwa Group):

(as of 1 January 2012)

Daiwa Securities Group Inc.

DAIWA GROUP 1

Daiwa Capital Markets Europe Limited (100%)

Daiwa Capital Markets America Inc. (100%)

Daiwa Capital Markets Asia Holding B.V. (100%)

Daiwa Next Bank, Ltd. (100%)

Daiwa Securities Co. Ltd. (100%)

Daiwa Asset Management Co. Ltd. (100%)

Daiwa Securities Business Centre Co., Ltd. (100%)

Daiwa Real Estate Asset Management

Co. Ltd. (100%)

Daiwa Property Co., Ltd. (99.4%) 3

Daiwa SB Investments Ltd. (43.96%)

Hinode Securities Co. Ltd. (95.26%)

Daiwa Institute of Research Holdings

Ltd. (100%)

Daiwa Institute of Research Ltd. (100%)

Daiwa Institute of Research Business

Innovation Ltd. (100%)

Daiwa Capital Markets America Holdings

Inc. (100%)

Daiwa Securities SMBC Principal Investments Co.

Ltd. (60%)

Daiwa PI Partners Co. Ltd. (95%)

Daiwa Corporate Investment Co., Ltd.

(93.33%) 4

Daiwa Investment Management Inc. (100%)

Daiwa Securities Capital Markets Co.

Ltd. (99.97%) 2

Daiwa Capital Markets Financial Products (Cayman)

Ltd. (100%)

Daiwa Securities Capital Marktes Korea Co., Ltd.

(100%)

Daiwa International Holdings Inc. (100%)

Daiwa Capital Markets

Investment Services Pte Ltd. (51%)

Note: 1 This diagram depicts main subsidiaries only. 2 Hinode Securities Co. Ltd. owns 0.02%. 3 Hinode Securities Co. Ltd. owns 0.59%. 4 Daiwa Securities Capital Markets Co. Ltd. owns 6.67%

Daiwa Capital MarketsInvestments Hong Kong

Limited (100%)

Daiwa Capital MarketsInvestments Asia Limited (100%)

Daiwa Institute of Research (Hong Kong)

Limited (100%)

Daiwa Capital Markets Hong Kong

Limited (100%)

DBP-Daiwa Capital Markets

Philippines, Inc. (60%)

Daiwa Capital Markets Fixed Income Private

Limited(99.99%)

Daiwa-Cathay Capital

Markets Co., Ltd.

(90%)

Daiwa Capital Markets IndiaPrivate Ltd.

(99.99%)


Australia Limited (100%)

Daiwa Capital MarketsFutures Pte Ltd. (100%)


Singapore Limited (100%)

(49%)Daiwa Capital Markets Trading

Hong Kong Limited (100%)

Licensing Status in Hong Kong

We are licensed under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) to conduct Type 1(dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 6 (advising on corporate fi nance) regulated activities.

We are also an exchange participant of The Stock Exchange of Hong Kong Limited and Hong Kong Futures Exchange Limited, a broker participant of the Hong Kong Securities Clearing Company Limited and a clearing participant of the HKFE Clearing Corporation Limited.

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Business

We are part of a wide-ranging securities and fi nancial services group headed by DSGI and we are currently engaged in, amongst others, securities and futures dealing (such as equities, institutional sales, fi xed income), proprietary trading in listed investment and investment banking services (such as equity capital markets, debt capital markets and merger and acquisitions).

The Daiwa Group completed the acquisition of KBC Group NV’s global convertible bond and Asia equity derivatives businesses on 19 November 2010. The acquisition forms a major part of the Daiwa Group’s strategy to build a leading global derivatives business in Asia.

Authorized Share Capital

As at the date of this document, our authorised share capital is HK$100,000,000 divided into 10,000,000 shares of HK$10.00 each and US$ 536,734,230 divided into 53,673,423 shares of US$10.00 each, all of which have been issued and fully paid.

Directors

The names and titles of the current members of our Board of Directors are set out below:

Name Title

Yoshio Urata Chairman

Hironori Oka President and Chief Executive Offi cer

Terence Patrick Mackey Deputy President and Chief Operating Offi cer

Sumio Otsuka Senior Managing Director

Shoichi Saito Managing Director

Nagahisa Miyabe Managing Director

The business and service of process address of each member of our Board of Directors is Level 26, One Pacifi c Place, 88 Queensway, Hong Kong.

Financial Statements

Our auditors are KPMG of 8th Floor, Prince’s Building, 10 Chater Road, Central, Hong Kong and our fi nancial statements have been prepared for the year ended 31 March 2011 and 31 March 2010. An unaudited interim report has also been prepared for the six months ended 30 September 2011.

Risk Management

The Daiwa Group has established a strong, independent and prudent risk management framework to manage the risks of the Daiwa Group on a global basis. The Group Risk Management Committee of DSGI in Tokyo, reports to the Executive Committee which in turn reports to the Board of Directors of DSGI in Tokyo.

The Group Risk Management Department is responsible for the overall supervision of the Risk Management function globally.

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Organisation Chart of DSGI (as of 1 January 2012)

Compensation Committee

Audit Committee

Nominating Committee

Office of the Audit Committee

Group Risk Management Committee

Disclosure Committee

Group IT Strategy Committee

Overseas Management Committee

Group Internal Audit CommitteeRepresentative Executive Officer

Executive Committee

Board of Directors

Shareholders’ Meeting

Group Internal Audit Department

Secretariat Office

Human Resources Department

Corporate Planning Department

Compliance Department

Corporate Communication Department

Investor Relations Department

Information Technology Department

Finance Department

General Affairs Department

Business Process Planning& Administration Department

Mental Health Support Department

Group Risk Management Department

Independence of risk management

Effective management and organisational structure is established to ensure that businesses are conducted in a sound, effi cient and effective manner.

Front and back offi ce functions are independent and in line with segregation of duty requirements to create an appropriate control environment.

The Risk Management function is independent from all businesses and reports ultimately to the Group Risk Management Department. This set up ensures independent monitoring of risk taking activities and full objectivity when assessing the risk profi le of the fi rm, including when assessing new business proposals or large transactions.

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Risk management process

The independent risk management process at the Daiwa Group can be decomposed into several steps:

• Risk identifi cation: prior to developing new business initiatives, the New Product Approval process seeks to identify risks that have not affected the fi rm so far and to ensure that they can be handled appropriately. Also, risk managers review risk on an on-going basis to detect risks of a new nature that could affect the Daiwa Group’s risk profi le and to integrate these in the risk framework.

• Risk quantifi cation: risk managers develop and maintain adequate methodologies to measure and monitor market and credit risks.

• Risk reporting: daily risk reporting, covering market risk and counterparty risk, ensures timely measurement and monitoring of risks and communication to senior management.

• Risk controlling and mitigation: the application of risk limits allows strict maintenance of actual risks within the risk appetite expressed by senior management. Risk limits impose built-in diversifi cation across both market risk positions and asset classes, and, for counterparty risk, also across entities of the same group, the same industry sector, and/or similar ratings. When a risk concentration is detected, the Risk Management function may recommend a suitable hedging strategy, including an outright reduction in the offending position.

Senior management information

The Group Risk Management Committee and the Executive Committee are duly kept informed of the risk profi le of the Daiwa Group on a regular basis.

All detailed risk information are made available and are distributed to business heads and to senior management regularly.

Material changes in the risk profi le and risk concentrations are highlighted to business heads and the Group Risk Management Committee members in a concise and contextual manner.

RISK CATEGORIES AND CONTROL PROCESS

1 MARKET RISK

Market risk is the exposure to potential losses resulting from adverse changes in the value of the positions held by the Daiwa Group on its trading books. Market movements impact the value of positions held across the various Daiwa Group’s business units, including market making, proprietary trading, underwriting commitments and so on.

Several types of risk measures are used to assess, report and control market risk.

• Value-at-Risk (VaR) measures the maximum potential loss over a given period of time and with a given confi dence level. The Daiwa Group uses a one day horizon, measuring the potential impact of adverse overnight market movements. The VaR is calculated using a 99% confi dence level, which means that observed mark-to-market losses are expected to exceed the VaR predictions within a 1% probability.

• Risk sensitivities measure the value change of the portfolio as a function of small changes in individual market risk factors e.g. stock market levels, foreign exchange rates, interest rates etc. This measures the risk of the portfolio and quantifi es the immediate value impact of market movements.

• Stress testing addresses potential changes in the value of the portfolio under extreme market movements, whether hypothetical or historical (applying past market crisis to today’s market environment). The resulting overall change in portfolio value is a direct indication of the potential loss or profi t that the business is exposed to, should the assumed scenario occur.

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Policies and limit framework

Market risk is controlled through policies and limits.

Policies establish responsibilities, mainly in terms of limit setting and transactional approval, while market risk limits materialize the risk appetite of the fi rm.

The market risk limit structure is a framework within which the various businesses of the Daiwa Group must operate. Its objective is to control and limit the amount and the nature of the market risk incurred by the fi rm. It relies on explicit limits applying to some of the market risk measures detailed above, namely VaR, risk sensitivities, and/or stress testing results.

Diversifi cation of risk taking is imposed through limits, whereby the aggregate risk limit of the fi rm is lower than the sum of the individual risk limits applied to the various trading desks. Limit usage is calculated and reported on a daily basis, as part of the daily market risk reporting process. As soon as they are identifi ed and verifi ed, limit excesses follow a specifi c procedure aimed at resolving the breach through one of three possible outcomes: the risk falls back within the limit, or the limit is temporarily increased, or the limit is permanently increased.

Limit setting, as well as breach processing, follows a clearly defi ned procedure, with various levels of authority, from individual risk managers to the head of risk and senior management.

Risk mitigation

The fi rst and most important way to mitigate market risk taking is to set up adequate market risk limits, whether in terms of nature or magnitude. Enforcing strict diversifi cation through limit setting, based on the trading mandates of the various businesses, is a powerful tool to reduce the aggregate market risk of the fi rm across all its desks.

The second way to mitigate market risk is by direct action. When a specifi c risk concentration not entirely captured by the limit framework is identifi ed within a desk, the market risk function will make hedging or risk reducing recommendations to the head of the relevant business.

Alternatively, the market risk function may decide to reduce certain limits to reduce the fi rm’s exposure to a level compatible with the declared risk appetite. As market conditions constantly change, the riskiness of positions will also change, and may result in a signifi cant increase in the amount of risk present on the Daiwa Group’s books although the nature and amount of positions has not changed. It is the role of the market risk function to identify such instances and to recommend remedial actions where appropriate.

2 OPERATIONAL RISK

Operational risk is the risk of losses arising from failed internal processes and systems, from personnel’s actions or from external events. Operational risk can lead to monetary losses, reputational damage or regulatory sanctions. Typical operational events include transaction errors and information technology system issues.

Risk measures

History of observed monetary losses provides a view on the magnitude of past loss events. Loss estimates calculated under certain incident scenarios, help to quantify likely losses, especially for new businesses.

Policy

The Daiwa Group manages operational risk by establishing clear policies and employing suffi cient human and technological resources. Controls over operational risk are designed to ensure that all relevant transactions are appropriately approved and that checks and balances are in place over their processing, recording and reconciliation.

All transactions must be accurately recorded and properly refl ected in the internal systems and records on a timely basis. Policies and procedures are reviewed and updated in light of changing market circumstances and regulatory requirements.

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The operational risk policy defi nes the duty of care of all departments in the fi rm, whether business or support and control functions. It establishes in particular the process leading to the reporting of all incidents and sets up operational risk identifi cation.

Risk mitigation

Existing business activities are periodically reviewed through risk controls and self-assessments. This process aims to identify operational risks yet undetected and to ensure adequate remediation action is taken. Recommendations issued by the operational risk team as a result of an assessment are scrupulously followed up until satisfactory implementation.

Operational incidents are logged on an ongoing basis. Incidents must be reported by all businesses to the operational risk team of the Daiwa Group.

The Group Internal Audit Department of DSGI independently assesses DSGI’s control environment, identifying opportunities for improvement and working with management to mitigate risk and drive change. The Group Internal Audit Department provides the Group Internal Audit Committee with an independent assessment of the control environment. The Group Internal Audit Department reviews and evaluates the adequacy of the fi rm’s operating policies and procedures and the effectiveness of internal controls in accordance with established policies and procedures.

3 CREDIT RISK

Credit risk is broadly the potential loss resulting from a counterparty or an issuer failing to perform on its contractual obligations.

Counterparty risk arises in the context of transactions with other entities, whether security purchases or sales, or over-the-counter transactions.

Counterparty risk has four components:

• Settlement risk: this is the risk that payment instructions or security delivery instructions are not executed as required and may generate a loss.

• Marked-to-market risk: this is the instantaneous loss suffered in case of a counterparty defaulting. This corresponds to the cumulative value of the transaction, minus the sum of all margin calls posted to the Daiwa Group over the life of the trade.

• Potential future exposure: this is the likely future positive value of the marked-to-market exposure of the transaction; in other terms, it tells us how large our exposure to a counterparty may become in the future.

• Liquidation risk: this is the risk of potential losses arising from liquidation of assets held as collateral, after a counterparty has defaulted.

Issuer risk arises from securities such as bonds undergoing a credit event such as a rating downgrade, a default of coupon payment, or an outright default on the principal amount. Such events usually cause the price of the security to drop and cause a loss to the holder. Issuer risk is measured primarily using the marked-to-market exposure by issuer.

Risk measures

The Daiwa Group is exposed to various kinds of credit risk across its different business lines and operations. These credit risks are measured separately using dedicated methodologies.

Counterparty risk components are measured using true exposure for settlement risk and marked-to-market risks. Potential future exposure and liquidation risk are measured using statistical methods such as VaR.

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Counterparty risk is controlled through their respective limit frameworks.

Counterparty risk is limited using across all components together, with the exception of settlement risk being limited separately since it is seen as fundamentally of different nature to other credit risks.

Risk mitigation

Credit risk mitigation addresses issuer risk and counterparty risk separately.

Issuer risk can be hedged using credit default swaps, short stocks and long puts that will provide a positive pay off in case the issuer defaults.

All four components of counterparty risk can be mitigated to some extent.

• Settlement risk is reduced by imposing limits to the amount being settled on any given day with a counterparty. Delivering securities only after the corresponding payment has been delivered to the Daiwa Group removes the settlement risk.

• Marked-to-market risk is reduced or mitigated through daily margin call payments. Every day, the collateral management team, part of the risk management function, issues margin calls to relevant counterparties in order to bring back the Daiwa Group’s exposure within the pre-agreed level as described in the documentation signed with the relevant counterparties. Netting of offsetting exposures across different transactions is also used.

• Potential future exposure can be mitigated by reducing the maximum time after which margin call payments are received from the counterparty. In addition, maximum tenor and/or product specifi c limits may be set against a counterparty.

• Liquidation risk is mitigated by imposing suffi cient liquidity criteria on eligible collateral. In addition, collateral concentration guidelines strongly discourage the emergence of concentration risk in the collateral assets held on the back of relationships with various counterparties.

The counterparty on-boarding process contributes to the reduction of counterparty risk. The Daiwa Group credit risk team performs an internal review of the credit worthiness of each new counterparty based on a rigorous and comprehensive process.

For OTC transactions, external counterparties are usually required to enter into an ISDA Master agreement and a Credit Support Annex, where appropriate. In exceptional cases, where trade volume is expected to be limited, derivatives transactions may be transacted under a long form confi rmation.

A credit approval process is carried out for all new counterparties covering:

• The fi nancial status of client, including, but not limited to, capital, assets, management, earnings and liquidity.

• Checks to ensure that the counterparty has appropriate authority to enter into transactions.

• A review to ensure that the proposed transactions are appropriate for that counterparty.

• If necessary, a detailed due-diligence on that counterparty.

• Assignment of internal rating according to the internal credit rating methodology.

The above items are used collectively to determine an appropriate credit limit.

Legal documentation agreed between the Daiwa Group and the counterparty defi nes, amongst other things, eligible collateral, margin call mechanism and early termination clauses.

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4 LIQUIDITY RISK

Liquidity risk is the risk that the fi rm may become unable to repay its liabilities as they become due. Its core component is access to cash through available capital reserves or funding or access to assets with enough liquidity to be sold in the market within a very short period of time, including in times of heightened market volatility.

Risk measures

Liquidity gap measures potential funding requirements. The size of the cash buffer maintained by the treasury desk is also a direct measure of reserve cash.


The liquidity policy determines the role and responsibility of the treasury desk as the central funding desk of the Daiwa Group. It also defi nes the relationship of the treasury desk with all businesses that have daily funding requirements to satisfy. Liquidity limits are in place and a daily liquidity report provides future funding needs and assesses them against the maximum allowable gap.

Risk mitigation

Suffi cient contingent funding arrangements are put in place to ensure that the Daiwa Group can meet its liabilities in case access to cash became severely restricted. A liquid assets or outright cash is maintained at all times and monitored against a minimum acceptable level by the treasury desk.

5 LEGAL AND COMPLIANCE RISK

The senior management of the Daiwa Group has the ultimate responsibility for establishing and maintaining an appropriate and effective legal and compliance function within the Daiwa Group and clear policies covering all relevant aspects of the business and operations of the Daiwa Group. The Legal and Compliance Departments in conjunction with senior management is responsible for identifying, measuring and monitoring the key legal and regulatory requirements of the Daiwa Group and assist in the management of such requirements and compliance risks.

The Legal and Compliance Departments exercises independent oversight and control over the business activities of the Daiwa Group and is set up primarily to assist senior management in establishing, maintaining, communicating and enforcing effective legal and compliance policies and procedures of the Daiwa Group, where there is reasonable assurance that business practice complies with the relevant laws and regulations and that material legal and compliance risks are identifi ed.

The process includes but not limited to the following:

(i) establish and implement relevant and effective policies, controls and procedures;

(ii) review and monitor the business activities of the Daiwa Group, and its directors, offi cers and employees to ensure compliance with the external and internal laws, rules, regulations, codes, policy and procedural requirements;

(iii) act as liaison with relevant external auditors, regulatory authorities and agencies to deal with and resolve compliance issues; and

(iv) provide information to senior management on applicable laws, rules, regulations, codes of conduct and requirements to assist them with their compliance responsibilities.”

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UNAUDITED INTERIM REPORT OF THE ISSUERFOR THE PERIOD ENDED 30 SEPTEMBER 2011

The information set out in this section is the reproduction of the unaudited interim report of the Issuer for the period ended 30 September 2011 (interim report 2011). Page references in this section refer to page numbers in the interim report 2011.

The principal accounting policies adopted in the preparation of the interim report 2011 are consistent with the Issuer’s usual accounting policies and procedures.

Our interim report 2011 is available for inspection at our offi ces at Level 26, One Pacifi c Place, 88 Queensway, Hong Kong. You may also visit our website at www.hk.daiwacm.com to access such report.

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Daiwa Capital Markets Hong Kong Limited

Unaudited Interim Financial Report for the six months ended 30 September 2011

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Daiwa Capital Markets Hong Kong Limited Interim financial report

for the six months ended 30 September 2011

Consolidated income statement for the six months ended 30 September 2011 (Expressed in United States dollars)

Six months ended 30 September

Note 2011 2010

Turnover 4 $ 64,695,524 $ 32,154,652

Other revenue 5 26,860,944 16,642,236

Other net income 5 465,737 1,832,187

Staff costs 6 (78,024,040) (48,720,391)

Depreciation 10 (3,722,068) (2,064,823)

Other operating expenses (61,213,521) (34,477,285)

Loss from operations $ (50,937,424) $ (34,633,424)

Finance costs 7(a) (645,270) (857,602)

Loss before taxation 7 $ (51,582,694) $ (35,491,026)

Income tax 8(a) - -

Loss for the period $ (51,582,694) $ (35,491,026)

The notes on pages 7 to 17 form part of this interim financial report.

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16



Consolidated statement of comprehensive income for the six months ended 30 September 2011 (Expressed in United States dollars)


2011 2010

Loss for the period $ (51,582,694) $ (35,491,026)

Other comprehensive income for the period

Exchange differences on translation of

financial statements of the subsidiary (1,753) 1,435

Available-for-sale securities: net movement in the investment revaluation reserve 331,411 (13,093)

Total comprehensive income for the period $ (51,253,036) $ (35,502,684)


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17



Consolidated balance sheet at 30 September 2011 (Expressed in United States dollars)

Note 30 September 2011 31 March 2011

Non-current assets

Intangible assets 9 $ 381,816 $ 382,047 Fixed assets 10 22,776,249 16,779,690 Available-for-sale securities 11 2,495,485 2,165,197 Other non-current deposits 4,213,722 3,381,100

$ 29,867,272 $ 22,708,034----------------------- ----------------------

Current assets

Trading securities 12 $ 120,704 $ 1,528,008 Amount due from the intermediate

holding company 13 - 1,858 Amounts due from fellow subsidiaries 13 - 1,504 Accounts receivable 19 812,634,043 1,615,123,258 Other receivables and prepayments 19 19,021,948 21,293,105 Cash and cash equivalents 14 557,627,149 370,150,519

$ 1,389,403,844-----------------------

$ 2,008,098,252----------------------

Current liabilities

Short positions in trading securities 12 $ - $ 124,237 Accounts payable 19 810,658,382 1,605,384,472 Current taxation 16(a) 34,882 47,574 Accruals and other payables 19 93,811,117 83,595,314 Subordinated loans 15 - 35,000,000

$ 904,504,381-----------------------

$ 1,724,151,597----------------------

Net current assets $ 484,899,463-----------------------

$ 283,946,655 ----------------------

Total assets less current liabilities $ 514,766,735 $ 306,654,689 ----------------------- ----------------------

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Consolidated balance sheet at 30 September 2011 (continued)(Expressed in United States dollars)

Note 30 September 2011 31 March 2011

Non-current liabilities

Deferred tax liabilities 16(b) $ 19,110 $ 19,121 Accruals and other payables 19 634,907 1,269,814 Subordinated loans 15 35,000,000 -

$ 35,654,017 $ 1,288,935----------------------- ----------------------

Net assets $ 479,112,718 $ 305,365,754

Representing:

Share capital 17 $ 557,860,644 $ 332,860,644

General reserve 18(a) 12,008,165 12,008,165

Investment revaluation reserve 18(b) 446,164 114,753

Translation reserve 18(c) (13,901) (12,148)

Accumulated losses (91,188,354) (39,605,660)

$ 479,112,718 $ 305,365,754


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Consolidated statement of changes in equity for the six months ended 30 September 2011 (Expressed in United States dollars)

Sharecapital

Generalreserve

Investmentrevaluation

reserveTranslation

reserveRetained

Profits/(losses) Total

At 1 April 2011 $ 332,860,644 $ 12,008,165 $ 114,753 $ (12,148) $ (39,605,660) $ 305,365,754

Share issued during the period 225,000,000 - - - - 225,000,000

Total comprehensive income for the period - - 331,411 (1,753) (51,582,694 ) (51,253,036)

At 30 September 2011 $ 557,860,644 $ 12,008,165 $ 446,164 $ (13,901) $ ) (91,188,354 $ 479,112,718

At 1 April 2010 $ 282,860,644 $ 12,008,165 $ (32,091) $ (3,956) $ 40,239,829 $ 335,072,591

Total comprehensive income for the period - - (13,093) 1,435 (35,491,026 ) (35,502,684)

At 30 September 2010 $ 282,860,644 $ 12,008,165 $ (45,184) $ (2,521) $ 4,748,803 $ 299,569,907

At 1 October 2010 $ 282,860,644 $ 12,008,165 $ (45,184) $ (2,521) $ 4,748,803 $ 299,569,907

Share issued during the period 50,000,000 - - - - 50,000,000

Total comprehensive income for the period - - 159,937 (9,627) (44,354,463 ) (44,204,153)

At 31 March 2011 $ 332,860,644 $ 12,008,165 $ 114,753 $ (12,148) $ ) (39,605,660 $ 305,365,754


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Condensed consolidated cash flow statement for the six months ended 30 September 2011 (Expressed in United States dollars)


Note 2011 2010

Net cash generated (used in)/from operating activities $ (31,027,465) $ 2,001,808

Net cash used in investing activities (6,365,967) (1,469,439)

Net cash generated from/(used in) financing activities 224,870,062 (490,760)

Net increase in cash and cash equivalents $ 187,476,630 $ 41,609

Cash and cash equivalents at 1 April 14 335,150,519 249,498,032

Cash and cash equivalents at 30 September 14 $ 522,627,149 $ 249,539,641

Analysis of balance of cash and cash equivalent

Bank balance and cash - general accounts 14 $ 522,627,149 $ 249,539,641


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Notes to the unaudited interim financial report (Expressed in United States dollars)

1 Basis of preparation

The unaudited interim financial report of Daiwa Capital Markets Hong Kong Limited and its subsidiary (“the Group”) has been prepared in accordance with the Hong Kong Accounting Standard (“HKAS”) 34 Interim financial reporting, issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”).

2 Accounting policies

The unaudited interim financial report has been prepared in accordance with the same accounting policies adopted in the Group’s financial statements for the year ended 31 March 2011.

3 Changes in accounting policies

The HKICPA has issued a number of amendments to HKFRSs and one new Interpretation that are first effective for the current accounting period of the Group. Of these, the following developments are relevant to the Group’s financial statements:

HKAS 24 (revised 2009), Related party disclosures

Improvements to HKFRSs (2010)

HK(IFRIC) 19, Extinguishing financial liabilities with equity instruments

The Group has not applied any new standard or interpretation that is not yet effective for the current accounting period. HK(IFRIC) 19 has not yet had a material impact on the Group’s financial statements as these changes will first be effective as and when the Group enters a relevant transaction. The remaining developments related primarily to clarification of certain disclosure requirements applicable to the Group’s financial statements. These developments have no material impact on the contents of this interim financial report.

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4 Turnover

Six months ended 30 September 2011 2010

Commission and brokerage income $ 50,719,215 $ 27,119,648 Underwriting and other commission income 12,285,367 3,976,270 Financial advisory fee income 1,028,502 663,284 Other commission income 662,440 395,450

$ 64,695,524 $ 32,154,652

5 Other revenue and other net income


Other revenue

Dividend income on proprietary trading positions $ 183,720 $ 684,600

Research fees earned from group companies 9,311,365 11,086,168 Management fees earned from group companies 16,819,663 4,152,341 Interest income 233,243 400,837 Rental income from related companies 312,953 318,290

$ 26,860,944 $ 16,642,236

Other net income

Net profit on back-to-back trading in debt securities $ 667,206 $ 1,194,207

Net (loss)/profit on proprietary trading in equity securities (468,857) 371,281

Net gain on foreign currency swap transactions 23,653 71,386Net gain on foreign currency transactions 129,745 90,022Loss on disposal of fixed assets (4) (1)Exchange gain/(loss) 36,806 (13,989)Others 77,188 119,281

$ 465,737 $ 1,832,187

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6 Staff costs


Salaries, wages and other benefits $ 75,928,321 $ 47,730,975 Contributions to defined contribution plan 2,095,719 989,416

$ 78,024,040 $ 48,720,391

7 Loss before taxation

Loss before taxation is arrived at after charging:


(a) Finance costs

Interest on bank loans $ 2,952 $ 10,136 Interest expenses on subordinated loans 330,946 497,895

333,898 508,031Other financing expenses 311,372 349,571

$ 645,270 $ 857,602

(b) Other items

Commission and brokerage charges $ 20,435,713 $ 8,824,846 Underwriting expenses 4,178,594 1,789,922 Operating lease charges on properties 8,651,232 5,448,290 Auditors’ remuneration 125,858 89,797

8 Income tax in the statement of comprehensive income

(a) No provision for Hong Kong Profits Tax has been made for the both periods as the Group sustained a loss for taxation purposes.

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24



8 Income tax in the statement of comprehensive income (continued)

(b) Reconciliation between tax expense and accounting loss at applicable tax rates:


Loss before taxation $ ) (51,582,694 $ ) (35,491,026

Notional tax on loss before taxation, calculated at 16.5% $ (8,511,145) $ (5,856,019)

Tax effect of non-deductible expenses 1,931,012 95,000Tax effect of non-taxable revenue (1,855,816) (173,957)Tax effect of unused tax losses not recognised 8,435,949 5,934,976

Actual tax expense $ - $ -

9 Intangible assets

The Group and the Company Trading

rightsClub

debentures TotalCost:

At 1 April 2011 $ 419,448 $ 382,043 $ 801,491 Exchange differences - (231) (231)

At 30 September 2011 $ 419,448 $ 381,812 $ 801,260 --------------- --------------- ---------------

Accumulated impairment loss:

At 1 April 2011 and 30 September 2011 $ 419,444 $ - $ 419,444

--------------- --------------- ---------------

Net book value:

At 30 September 2011 $ 4 $ 381,812 $ 381,816

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9 Intangible assets (continued)

The Group and the Company Trading

rightsClub

debentures TotalCost:

At 1 April 2010 $ 419,448 $ 41,862 $ 461,310 Additions - 340,306 340,306Exchange differences - (125) (125)

At 31 March 2011 $ 419,448 ---------------

$ 382,043 ---------------

$ 801,491 ---------------

Accumulated impairment loss:

At 1 April 2010 and 31 March 2011 $ 419,444 $ - $ 419,444 --------------- --------------- ---------------

Net book value:

At 31 March 2011 $ 4 $ 382,043 $ 382,047

10 Fixed assets

Leaseholdimprovements

Furniture,fixtures and

officeequipment

Motor vehicles Total

Cost:

At 1 April 2011 $ 1,895,261 $ 33,145,054 $ 317,947 $ 35,358,262 Transfer from a related

company - 5,552,340 - 5,552,340 Additions - 5,003,988 - 5,003,988 Disposals - (4) - (4)

At 30 September 2011 $ 1,895,261 $ 43,701,378 $ 317,947 $ 45,914,586 ----------------- ----------------- ----------------- -----------------

Accumulated depreciation:

At 1 April 2011 $ 825,339 $ 17,443,228 $ 310,005 $ 18,578,572 Transfer from a related

company - 837,697 - 837,697 Charge for the period 147,176 3,566,950 7,942 3,722,068

At 30 September 2011 $ 972,515 $ 21,847,875 $ 317,947 $ 23,138,337 ----------------- ----------------- ----------------- -----------------

Net book value:

At 30 September 2011 $ 922,746 $ 21,853,503 $ - $ 22,776,249

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26



10 Fixed assets (continued)

Leaseholdimprovements

Furniture,fixtures and

officeequipment

Motor vehicles Total

Cost:

At 1 April 2010 $ 1,113,044 $ 22,758,903 $ 317,947 $ 24,189,894 Additions 782,660 11,152,640 - 11,935,300 Disposals - (765,191) - (765,191)Exchange difference (443) (1,298) - (1,741)

At 31 March 2011 $ 1,895,261 $ 33,145,054 $ 317,947 $ 35,358,262 ----------------- ----------------- ----------------- -----------------

Accumulated depreciation:

At 1 April 2010 $ 580,890 $ 13,442,330 $ 291,783 $ 14,315,003 Charge for the period 244,793 4,308,261 18,222 4,571,276 Written back on disposals - (306,394) - (306,394)Exchange difference (344) (969) - (1,313)

At 31 March 2011 $ 825,339 $ 17,443,228 $ 310,005 $ 18,578,572 ----------------- ----------------- ----------------- -----------------

Net book value:

At 31 March 2011 $ 1,069,922 $ 15,701,826 $ 7,942 $ 16,779,690

11 Available-for-sale securities

30 September 2011 31 March 2011

Club debentures, at fair value $ 2,495,485 $ 2,165,197

12 Trading securities

30 September 2011 31 March 2011 Long positions in trading securities

Listed equity securities $ 120,704 $ 1,528,008

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27



12 Trading securities (continued)

30 September 2011 31 March 2011 Short positions in trading securities

Listed equity securities $ - $ 124,237

13 Amounts due from group companies

Amounts due from group companies are unsecured, non-interest bearing and repayable on demand.

14 Cash and cash equivalents


Deposits with bank $ 207,035,047 $ 209,023,840 Cash at bank and in hand 315,592,102 126,126,679

$ 522,627,149 $ 335,150,519Pledged deposit 35,000,000 35,000,000

$ 557,627,149 $ 370,150,519

15 Subordinated loans


Repayable within one year $ - $ 35,000,000 Repayable after one year but within five years 35,000,000 -

$ 35,000,000 $ 35,000,000

A subordinated loan facility of $140 million was granted by the intermediate holding company, Daiwa Securities Capital Markets Co. Ltd. The lender cannot recall the loan until 26 May 2013.

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15 Subordinated loans (continued)

Details of the terms of the subordinated loans are as follows:

Principal Interest rate Maturity date

$35,000,000 LIBOR + 1.2% 26 May 2013

16 Income tax in the consolidated balance sheet

(a) Current taxation in the consolidated balance sheet represents provision for Hong Kong Profits Tax for the last year.

(b) Deferred tax liabilities recognised:

The components of deferred tax liabilities recognised in the balance sheet and the movements during the period are as follows:

Depreciation allowances in excess of related depreciation

30 September 2011 31 March 2011 Deferred tax arising from:

At 1 April $ 19,121 $ 7,922 Credited to profit or loss - 11,217Exchange difference (11) (18)

$ 19,110 $ 19,121

(c) Deferred tax assets not recognised

The Group and the Company have not recognised deferred tax assets in respect of tax losses of $215,622,000 (31 March 2011: $164,495,000) as it is not probable that future taxable profits against which the losses can be utilised will be available. The tax losses do not expire under current tax legislation.

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17 Share capital

30 September 2011 31 March 2011 No. of shares Amount

No. of shares Amount

Authorised:

Ordinary shares of HK$10 each 10,000,000 $ 21,126,414 10,000,000 $ 21,126,414

Ordinary shares of US$10 each 53,673,423 536,734,230 31,173,423 311,734,230

63,673,423 $ 557,860,644 41,173,423 $ 332,860,644

Issued and fully paid:

Ordinary shares of HK$10 eachAt 30 September and 31 March 10,000,000 $ 21,126,414 10,000,000 $ 21,126,414

Ordinary shares of US$10 each At 30 September and 31 March 53,673,423 536,734,230 31,173,423 311,734,230

63,673,423 $ 557,860,644 41,173,423 $ 332,860,644

18 Reserves

(a) General reserve

The general reserve was established in accordance with the Hong Kong Banking Ordinance when the Company was a restricted license bank.

(b) Investment revaluation reserve

The investment revaluation reserve comprises the cumulative change in the fair value of available-for-sale securities held at balance sheet date and is dealt with in accordance with the accounting policies in note 2.

(c) Translation reserve

The translation reserve comprises the exchange differences arising from the translation of the financial statements of the subsidiary into the presentation currency of the Group.

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19 Group companies

The following balances with holding and fellow subsidiary companies are included in the indicated balance sheet captions in addition to those balances with group companies indicated elsewhere in these financial statements:


Accounts receivable $ 450,822,595 $ 334,825,063 Other receivables and prepayments 5,544,687 16,193,409Accounts payable (340,206,530) (1,250,051,239)Accruals and other payables (2,654,035) (8,536,654)

20 Material related party transactions

In addition to the transactions and balances disclosed elsewhere in these consolidated financial statements, the Group entered into the following material related party transactions:


Brokerage commission earned from fellow subsidiaries $ 1,361,662 $ 7,065,368 an intermediate holding company 5,383,495 7,321,217

Underwriting and selling commission earned from fellow subsidiaries 559,053 355,193an intermediate holding company 746,121 209,508

Brokerage commission paid to fellow subsidiaries (5,144,975) (5,611,474)an intermediate holding company (1,654,609) (3,926,785)

Interest expense paid to an intermediate holding company (330,946) (497,895)

Research fee paid to a fellow subsidiary (722,759) (637,854)

Rental income from fellow subsidiaries 312,953 318,290

Research fee income earned from an intermediate holding company and fellow subsidiaries 9,311,365 11,086,168

Management fee income from an intermediate holding company and fellow subsidiaries 16,819,663 4,152,341

16

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17

21 Credit facilities

The Group has aggregate credit facilities provided by authorised institutions and group companies amounting to $310,773,000 (31 March 2011: $237,079,000) and $2,174,566,000 (31 March 2011: $1,847,875,000) respectively. The credit facilities provided by authorised institutions were not utilised as at 30 September 2011 (31 March 2011: $Nil). Included in the credit facilities provided by group companies was a subordinated loan facility of $140,000,000 provided by an intermediate holding company. $35,000,000 of such facility was utilised as at 30 September 2011 and 31 March 2011 (see note 15).

22 Commitments

At 30 September 2011, the Group had the following commitments in the ordinary course of business:

The total future minimum lease payments under non-cancellable operating leases are payable as follows:


Within one year $ 17,880,585 $ 15,957,099 After one year but within five years 48,625,198 47,936,205 More than five years 26,826,715 32,594,959

$ 93,332,498 $ 96,488,263

23 Parent and ultimate holding company

The directors consider the immediate parent and ultimate holding company at 30 September 2011 to be Daiwa Capital Markets Asia Holding, B.V, which is incorporated in the Netherlands, and Daiwa Securities Group Inc., which is incorporated in Japan respectively. Daiwa Securities Group Inc. produces financial statements available for public use.

PARTIES INVOLVED IN THE PROGRAMME

Issuer

Registered offi ce of the IssuerDaiwa Capital Markets Hong Kong Limited

Level 26One Pacifi c Place

88 QueenswayHong Kong

Registrar, Agent and Transfer Offi ce

Computershare Hong Kong Investor Services LimitedRooms 1712-1716, 17th Floor, Hopewell Centre

183 Queen’s Road EastHong Kong

Auditors

KPMG8th Floor

Prince’s Building10 Chater Road

CentralHong Kong

daiwa capital markets hong kong limited · daiwa capital markets hong kong limited first addendum...

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