ANNUAL REPORT 2007

JAPAN SECURITIES FINANCE CO., LTD.

PROFILE
Growing in step with the securities industry andsupporting its future development
In June 1951, Japan Securities Finance Co., Ltd. (JSF) launched its
loaning operations, dealing with funds and stock certificates needed by
securities companies for delivery and settlement of margin transactions.
This margin loan business can be transacted solely by securities financecompanies licensed in accordance with the Securities and Exchange Law.
As Japan’s largest securities finance company designated by the Tokyo,
JASDAQ, Sapporo and Fukuoka Stock Exchanges, JSF is contributing
significantly to improve the fairness of stock price formation and liquidityof stocks in the secondary equity markets.

CONTENTS
Financial Highlights

1

Message from the President

2

Our Business Development

7

Our Business Field

8

Corporate Governance15

Risk Management

17

Business Results

21

Financial Section

24

Independent Auditors’ Report

41

Outline of the Corporate Group42

Corporate Data

43

FINANCIAL HIGHLIGHTS

Japan Securities Finance Co.,Ltd. and Consolidated Subsidiaries

2007(April 1, 2006 March 31, 2007)

2006(April 1, 2005 March 31, 2006)

Thousands of
U.S. dollars
2007(April 1, 2006 March 31, 2007)

￥

￥

＄

Millions of yen

Consolidated financial results

Oparating revenues
Net income
Net assets (period end)

43,524
4,156
122,876

37,226
4,953
118,962Yen
2007

368,691
35,205
1,040,881
U.S. dollars
2007

2006

Amounts per share

Net income
Net assets

￥

42.09
1,244.61

￥

＄

48.93
1,205.27

0.36
10.54

Note:U.S. doller amounts in this annual report are translated from Japanese Yen, for convenience only, at the rate of ￥118.05=US$1, the approximate
exchange rate at March 30,2007.

Operating revenues

Net income（Millions of yen）

（Millions of yen）

50,00037,22640,00035,00030,0006,000

43,52445,000

5,519
4,953

5,000

36,14528,661

4,156

4,002

4,000

30,8973,000

25,00020,0002,000

15,00010,000

1,746

1,000

5,000
0

03

04

05

06

0

07

03

Net income per share

04

48.93

42.09

1,200

1,169

1,151

03

04

1,276

1,205

1,244

1,000

38.76

40.00

07

（Yen）
1,400

54.08

50.00

06

Shareholders' equity per share

（Yen）
60.00

05

800
30.00
600
20.00

15.86

400

10.00
0

200
03

04

05

06

0

07

1

05

06

07

MESSAGE FROM THE PRESIDENT

Minoru Masubuchi
President

It is my sincere hope that the Annual Report 2007 for the fiscal year ended March 31, 2007 will be of use toshareholders, investors and other supporters of Japan Securities Finance Company.
BUSINESS REVIEW

and in the USA. From late November, it showed atrend towards recovery, in response to a strong US
stock market, a prevailing feeling of delay in therecovery of Japanese stock prices and expectations ofan improvement in corporate business performance.
In late February, the index rose to 1,816 points, its
highest level of the term. Thereafter, it dropped
slightly, in reaction to the spontaneous worldwide
decline in stock values and closed the fiscal year at
1,713 points.

Business Environment
When we look back on the performance of theJapanese economy during the fiscal year, we can saythat conditions were conducive to expansion, which
was sustained by healthy exports, an increasing levelof capital investment against a background of highcorporate earnings and an increase in demand, bothat domestic and abroad, which was resulting from anupsurge in consumer spending; being prompted by
gradually increasing levels of personal income.

The average daily trading volume on the First
Section of the Tokyo Stock Exchange during the
fiscal year stood at 1,985 million, a decrease of 195
million by comparison with the previous fiscal year.
However, the average daily trading value increased
by 410.9 billion yen over the previous fiscal year, toreach 2,663.1 billion yen, due partly to transaction
activities by foreign investors – mainly in highly priced
international blue-chip issues.

In the stock market, the Tokyo Stock Price Index(TOPIX), which started the fiscal year at 1,754 points,
continued to perform strongly during the first phase,but dropped to 1,458 points - its lowest level during
the fiscal term – in mid-June, reflecting the heightened
economic uncertainty that was provoked by the highprice of crude oil, strong yen and worldwide rises ininterest rates. It has been strongly influenced by oil
prices, as well as by business trends both in Japan

2

MESSAGE FROM THE PRESIDENT

Meanwhile, the outstanding balance ofstandardized margin buying in the Tokyo market rosefrom an initial level of 4,500 billion yen to the levelof 4,900 billion yen at one point in May, but thengradually declined again on account of bargain sales
by personal investors who had unrealized losses on
securities, caused by the sharp drop in stock prices. It
remained at the 3,000-billion-yen-level from October
until February. In March, it began to increase again
as a result of buying on dips in a downward trend
caused by the spontaneous worldwide decline in stock
values – and closed the fiscal year at 3,700 billion
yen. On the other hand, the outstanding balance ofstandardized margin selling fluctuated between thelevels of 900 and 1,000 billion yen, reaching a peak of
1,100 billion yen in February.

the previous year. This was due mainly to falls in theoutstanding balance of loans for margin transactions
and of trust bank loans.

Turning to the bond market, the yield on
newly-issued 10-year Japanese government bonds(JGBs), which started the fiscal year at 1.843%, rose
to 1.990% at one point in May, due to speculationthat the Bank of Japan would finally conclude its
zero-interest-rate policy. The yield continued to besensitive thereafter because of differing views about
the timing and the spread of the interest rate rise. It
reached 1.835 % on July 14, when the policy was
concluded. Then, the yield hovered at around 1.7%,
due to various unfavorable economic indices and tolowered expectations of an additional interest rate rise.
At one stage, It fell to 1.545%, following the decision
to increase interest rates again in February, when there
seemed to be no further new factors relevant to thebond market, and reached 1.649% at the end of theterm.

As a result, the consolidated operating profits
totaled 9,642 million yen (up 8.0% year-on-year), andthe consolidated recurring profits totaled 9,447 million
yen (up 13.9% year-on-year).

JSF group companies recorded the consolidated
operating profits of 43,524 million yen (up 16.9%
year-on-year), the result of increased interest revenues
from loans for margin transactions. This was also due
to raised loan rates in response to higher short-term
interest rates, as well as to the increased coupon
income of JGBs. On the other hand, the consolidated
operating expenses rose 30.2% year-on-year to 24,923
million yen, due to increased interest payments
resulting from higher short-term interest rates, withthe general and administrative expenses totaling 8,959
million yen (down 2.2% year-on-year).

JSF posted 585 million yen in extraordinary profits
attributable to the reversal of the allowance of doubtfulreceivables and other factors, as well as 1,399 million
yen in extraordinary losses, resulting from changes
in equity and other factors, in conjunction with theestablishment of a joint holding company by Japan
Information Processing Service Co., Ltd. and Japan
Securities Agents Ltd. and with partial sales of JSF
Information Technology Co., Ltd.’s equity. As a result,the consolidated net income for the period was 4,156
million yen (down 16.1% year-on-year).

Business Results of the JSF Group
Under these circumstances, the total value ofoutstanding loans extended by JSF group companies
during the fiscal year averaged 2,251.9 billion yen,a decrease of 508.1 billion yen by comparison with3

OUTLOOK FOR NEXT FISCAL YEAR

with the times. Our basic policy is as follows.
(1) Capture various needs in securities industry
with sincere recognition of its social
responsibility and public mission(2) Promote improvement systematically andop e ra ti on a l l y a n d e xte n d m a rg i n l o a nbalance in margin loan business, and further
strengthen profit foundation in otherbusiness(3) Obtain firm trust of stakeholders by the
improvement of corporate governance andthe control of management risk

Earnings Outlook
Turning to the outlook, the economy as a wholeis expected to continue expanding gradually in anenvironment in which Japanese economic activities
are on the increase, as is evidenced by higher levels ofcapital investment, by companies’ increasing feeling oflabor force shortage, by strong export performance andby increases in employees’ personal incomes.

Under these circumstances, the company
anticipates gains both in operating income and inrecurring income, due to the positive contribution ofraised interest rates during the period; although there
will be a slight decrease in the outstanding balance ofloans for margin transactions. However, as there will
be no longer the reversal of the allowance of doubtfulreceivables and the gain on sale of subsidiaries, both ofwhich are reported in the current period, a slight loss
in net income is expected.

Basic Policy on Profit Sharing
JSF regards the stable long-term return on its profits to
its shareholders as an important priority. The company
follows a basic dividend payments policy, with aview to strengthening its capital base and its internal
reserves, taking account of its business performance.

As a standard which reflects our businessperformance, we have established a dividend policy
under which we return on our profits so that thedividend payout ratio (non-consolidated) is about 40 %.
On the basis of this principle, we have decided
to pay an annual dividend of 26 yen per share for thisfiscal year.

With regard to consolidated subsidiaries, it isexpected that JSF Trust and Banking Co., Ltd. willachieve increases both in sales and in profits, while
Nihon Building Co., Ltd. will maintain a profit level
similar to that of the previous fiscal year. Among theequity-method affiliates, JBIS Holdings, Inc., forecasts
an increase in profit. Netwing Securities Co., Ltd. is
expected to maintain a level of profit similar to thatof the previous fiscal year, but JSF forecasts dilution
losses resulting from changes in equity arising fromthe merger with Maruwa Securities Co., Ltd. that isscheduled for October this year.

In conformity with our fundamental policy ofsetting the dividend payout ratio on a non-consolidated
basis at about 40%, we will take account both of
dividend payout ratio and dividend on equity (DOE)
on a consolidated basis.

Basic Management Policy
As an institution specializing in the securities financebusiness, Japan Securities Finance has a mission
to contribute to the development of the securities
industry. The company will continue to meet thedemands that society may make upon it and to move

Present Management Strategy
1. Mid-Term Management Plan
We are now committed to achieving the Mid-Term
Management Plan, formulated in March 2006, forthe three years from FY 2006 till FY 2008. The
details of the plan are as follows.

4

MESSAGE FROM THE PRESIDENT[Management Target]
To achieve a recurring income of 12,000 million yen
on a non-consolidated basis by the final year of thePlan, i.e. FY 2008 (this management target makes
certain assumptions in respect of loan balance andshort market interest rates):transactions, the number of loanable issues wasincreased (up 56 issues from the end of theprevious term) by procuring stock certificates.
This has increased the number of loanable issues
to 1,688 as at the end of March 2007.
(2)Increase in Our Ability to Procure Funds
In order to cope flexibly and efficiently with therapidly-increasing value of loans, the maximum
limit of commercial paper to be issued, as one of
the means of procuring funds, was increased from600 billion yen to 1,000 billion yen.

[Strategies](i) Strengthen Margin Loan Business(ii) Expand secured loan and stock loan through
JSFNET(iii) Boost Loans for General Margin Transactions andloans to individuals via through internet facility(iv) Offer low-priced and good quality service bystrengthening cash funding sources and inproved
efficiency of organization and business operation(v) Positive action for Securities Settlement Systems
Reform(vi) Strengthen corporate governance and risk
management, and Enhance compliance program(vii) Review capital tie-up with group companies forsynergy and unrestricted management

3. Achievements during This Term
Our major achievements during this term are as
follows:(3)Strengthening of Internal Controls
JSF is committed to the further strengtheningof corporate governance, the improvement ofmanagement efficiency and the expediting ofbusiness transactions. This will be achieved
through the introduction of an operating
officer system and a reduction in the number of
directors from twelve to nine. Also, the company
abolished the system of retirement benefits for
directors and officers in order to clarify their
management responsibilities and introduced astock-price-linked remuneration system, so as
to reflect the company’s business results more
directly in their emoluments.
With regard to internal controls, thefunctions of the Inspection Department havebeen completely revised and it has been renamed
the Audit Department. The purpose of thesechanges was to strengthen the Department’s
monitoring activities – which include the audit
control of our entire business management - byconducting stricter internal risk management
audits, including credit and many other risks, andto ensure compliance.

(1)Increase in the Number of Loanable Issues
In order to improve the convenience of margin(4)Strengthening of Risk Management
In recent years, the role of risk management in

2. Strengthening of Investor Relations Activities
We will commit ourselves to the strengthening ofIR activities by further improving the quality of our
information disclosure to shareholders and investors
through our home-pages or financial presentation
meetings. JSF mounted an IR event for individual
investors in July 2006, and will continue to hold IR
meetings with institutional investors. We shall also
engage in proactive IR undertakings with foreign
institutional investors.

5

MESSAGE FROM THE PRESIDENT

financial institutions has become more important,which face increasingly diverse and complex risks
as the business environment changes. In view ofthis, JSF has completely revised the duties of its
Research Department. It has been renamed the
Risk Management Department and its functions
include the introduction of integrated risk
management, designed to ensure sound business
management and higher profitability.

to the increasingly diverse needs of the securities andfinance industry and to contribute to the developmentof securities market as a specialist in securities financebusiness. To give a concrete example, we will seek
improvements in both systems and operations forour primary service of providing loans for margintransactions under the Mid-Term Management Planannounced in March of last year. Strengthening ourability to procure stock certificates will also continue
to be an emphasis with a view to expanding thenumber of loanable issues, and we hope to strengthen
our competitiveness. Also, the outstanding balanceof loans for negotiable margin transactions is steadily
increasing and we will do our utmost further to solidify
our revenue base through the expansion of businessother than that of loans for margin transactions, with afocus on further increasing the outstanding balance byattracting new customers.

(5)Review of capital ties between group companies
On July 3, 2006, JSF and its subsidiary Nihon
Building Co., Ltd. assigned some of their sharesin JSF Information Technology Co., Ltd. to Japan
Information Processing Services Co., Ltd. Also,
Japan Information Processing Services Co., Ltd.
and Japan Securities Agents, Ltd. have establisheda joint holding company, JBIS Holdings, Inc.,
to which the two companies assigned shares on
October 2, 2006.

JSF Trust and Banking Co., Ltd. will make further
contributions to the development of the securities
market as a trust bank serving for the securities
market. To this end, it will use its trust-bank skills to
expand into operations such as customers’ segregatedmoney trust or securities trust. It will also strengthen
the marketing capacities of its loan and trusts
departments so as to create a stable and balanced profit
structure.

Future Challenges (Strategy)
In the financial and securities market, there is anincreasing and broadly-based sector of personal
investors. This is evidenced by the outstandingbalance of the stock investment fund, which rose toalmost 60 trillion yen in March of this year due tothe development and sale of a variety of investment
products. With the aim of encouraging a steady flowof funds from savings to investments, the Financial
Instruments and Exchange Law was formulated in Juneof last year as a cross–over measure to protect investors.
Preparations for the dematerialization (digitalization)of stock certificates, which is scheduled for completionin January 2009, are now moving forward during thefinal stage of the reform of the securities clearing andsettlement system.

We will continue to review group-wide operations
and capital relationship so as to further strengthen JSF
group’s base of operations within the securities market
and improve JSF groups overall stength and capacity.

Under these circumstances, we believe that Japan
Securities Finance has a mission to respond flexibly

Minoru Masubuchi
President

6

OUR BUSINESS DEVELOPMENT

Services for securities companies and financial institutions

Funds loan
Loans for margintransactions

Loan funds needed to settle standardized margintransactions

Stock loan
Loan stock certificates needed to settle standardized
margin transactions

General stock lending

Lending stock certificates needed to settle stock trading

Brokerage between borrowers and lenders in bondborrowing and lending market

Bond services
Gensaki transactions of JGB,Outright transactions

Loans for negotiablemargin transactions

Loan funds needed to settle negotiable margintransactions

Bond financing

Loan funds needed in bond underwriting, trading, etc.

General loans

Loan working funds, etc., to securities companies

Secured loans on securities for indivisual and corporate investors

Direct loans
Bond financing

Direct loans to customer

General loans

Safekeeping
deposited loans
Loans on securities in safekeeping account, withincredit line set before

Peripheral services

Securities custody

Custody services for securities owned byinstitutional investors, etc.

Government bonddebt servicing

Designated by the Bank of Japan, repayment services
for principal and interest on government bonds

7

OUR BUSINESS FIELDLOANS FOR MARGIN TRANSACTIONSWhat is Margin Transactions?
In margin transactions, an investor trades stocks after(1) depositing a certain amount of collateral (margin
requirements) with a securities company and (2)borrowing funds for purchasing stock or stock certificatesfor sale. Margin transactions help investors to expand
their trading volumes by enabling them to purchase stock
which value is in excess of their available funds, or to sell
stock that they do not own. Thus, margin transactions
broaden and strengthen stock trading and contribute to
the smooth circulation of stocks and the fair stock prices
formation.
Margin transactions is used, for example, when an
investor considers that the stock price of a certain issue
will rise or decline sharply in a short period of time.

Apart from the purpose of obtaining margins as
described above, an investor can use margin transactions
as a means for hedging. In other words, in the event that,
although an investor expects that the stock price in hand
may decline, the stock is not to be sold for some reasons,such as that convertible bond is within its convertible
period or that it is a publicly-offered stock just purchased,
the investor can avoid loss with hedging sale by using
margin transactions.
There are two types of margin transactions,standardized margin transactions and negotiable margintransactions. In standardized margin transactions, interest
rate on loans or terms of repayment are determined bystock exchanges, and a securities company can borrowfunds for purchasing and stock certificates for sale needed
to settle transactions from a securities finance company(loans for margin transactions).
In negotiable margin transactions, which is limited
to cases in which a securities company can procure
funds and stock certificates to be lent to customers byinternal matching (Note) or external procurement withoutborrowing from a securities finance company, thecondition of margin transactions may be decided freely
in negotiations between a securities company and its
customer.

・When it is expected that the stock price will rise, aninvestor borrows funds for purchasing stock from asecurities company (margin buying), and if the stock
price rises as expected within a term of repayment(6 months), the investor sells the stock, repays thefunds borrowed (reversing transaction) and receives
the margin. The investor may also receive the stock
certificates (actual receipt) by procuring funds
separately and depositing it with a securities company.
・Conversely, when it is expected that the stock pricewill decline, an investor borrows stock certificates froma securities company and sells them (margin selling). If
the stock price declines as expected within the term of
repayment(6 months), the investor buys back the stock,returns it to a securities company and receives themargin. The investor may also receive the equivalentmoney to stock certificates sold by procuring stock
certificates separately and offering them to a securities
company (actual delivery).

(Note) This is a system of appropriating purchased stock certificates received
from buy side as collateral to sell side's stock certificates for sale within
a company or, conversely, of appropriating sell side's proceeds of sale tobuy side's funds for purchasing stocks.

8

OUR BUSINESS FIELD

What is Loans for Margin Transactions?
Loans for margin transactions is a system in which asecurities finance company receives a certain amount ofmargin (margin requirements) from a securities company,
which is a general trading participant of stock exchanges(3) and lends funds or stock certificates necessary for
margin transactions (4). This is executed through theclearing facilities of stock exchanges. Loans for margintransactions is authorized only for the securities financecompanies with a license given by the Prime Minister.
We, Japan Securities Finance Co., Ltd. conduct loans for
margin transactions through the stock exchange in Tokyo,

Sapporo, Fukuoka, and JASDAQ.
JSF receives loan applications for each issue from asecurities company on the trading date of standardized
margin transactions(5).To execute the loan, JSF, inplace of the securities company, delivers funds or stock
certificates to clearing facilities of stock exchanges(6). The
stock certificates purchased (collateral stock certificates
for loans) or proceeds from sale (collateral money for stockloans) are received by JSF(7), and then each collateral isappropriated.

Standardized margin transactions and Loans for margin transactions

Standardized margin transactions

Loans for margin transactions

Securities company

Loan funds for purchasing
stock or stock certificates to sell(2)Deposit collateral for margintransaction(3)JSF

Customer

Deposit brokerage margin(1)Loan funds for purchasing stock
or stock certificates to sell(4)Receive purchased stock
certificates or sale proceeds
(6)

(7)

Stock exchange
clearing facilities

9

Japan Securities Finance

Submit application(5)Place trade orderHanding of over-lent issues
JSF usually appropriates stock certificates received ascollateral for loans to stock loans. However, should theoutstanding stock loans exceed the outstanding loans,
it is necessary to procure the stock certificates needed
for settlement by bidding with securities companies or
institutional investors such as life and non-life insurancecompanies, banks and other sources. The highest bidding
rate becomes the lending rate (Premium Charge) of thatissue. This premium charge is applied to all users ofstandardized margin transactions, and should be collectedby all sell sides and paid to all buy sides or successful
bidders.

In case of Premium Charge may apply
Standardized margin transactions

Loans for margin transactions

Issue A

7,000shares
Funds loan application

2,000
shares5,000shares

7,000shares
Amount matchedwithin each firm

5,000
shares2,000shares

Margin selling Margin buying
balancebalanceSecurities company A
Stock loanbalance

10,000shares

Margin loanbalance

JSF
Stock loan application

7,000
sharesStock procurement through bidding

3,000shares
Amount matchedwithin each firm

Stock loan application for bidding
Margin selling Margin buying
balancebalanceSecurities company B

Securities companies / Institutional investors

10

OUR BUSINESS FIELD

BOND SERVICES

Transaction types
REPO transactions
JSF borrows bonds after depositing cash collateral with alender and then lends bonds after receiving cash collateralfrom a borrower. This transaction can be either a Special
Collateral transaction that specifies an issue or a General
Collateral transaction that does not specify an issue.
Ordinary bond borrowing and lending transactions
JSF, in principle, borrows bonds without collateral from alender and then lends bonds after receiving collateral froma borrower.
GensakiThis transaction involves resale or repurchase of the same
type and quantity of bonds, etc., at a prescribed price after
a fixed period agreed upon in advance between transacting
parties.
JGB Gensaki operations by BOJ
The Bank of Japan has selected JSF as a participant ofJapanese government bond (JGB) operations. Transaction
format between JSF and the Bank of Japan is Gensaki,
while the transaction between JSF and counterparty is
conducted by Gensaki or Repo transaction.
Outright transactions
JSF conducts outright buying and selling of Treasury
Bills or Financial Bills, and has developed a system in its
securities business that enables efficient investment andmanagement in combination with Gensaki.

In bond borrowing and lending transactions, a lenderlends bonds to a borrower, and after mutually agreed
period, the borrower repays the lender with bonds of thesame type and quantity. JSF serves as a broker between
borrowers and lenders.
The bond borrowing and lending transactions market
was established in May 1990 for the purpose of covering
bonds sold short, and was followed in April 1996 by the
introduction of REPO (cash-collateral bond borrowing
and lending transactions). JSF was the first company inJapan to be authorized to offer such brokerage services,because JSF can link securities industries and financial
industries on neutral ground and is well versed inhandling of bond transactions.
JSF receives applications from both parties and, on
their behalf, lends and borrows bonds on the basis ofloan agreement. This type of arrangement has several
advantages, including helping to form a transactionthat matches the needs of both lender and borrower,
maintaining high confidentiality of information to ensure
the complete privacy of both parities, and transferring
all counterparty credit risk to JSF. The arrangement also
contributes to creating fair and stable market by publicly
disclosing indication via QUICK, Bloomberg, and otherinformation services.

Transaction structure(Process from application to agreement)
Lenders
Securities Companies
Financial institutions
Institutional inverstors

Application(offer)

Application(bid)Notice of agreement

Notice of agreement

Pledge of collateral(＊)

JSF

Borrowing

Borrowers

Pledge of collateral(＊) Securities Companies
Financial institutions
Lending

Indication

QUICK
Bloomberg*In cash-collateral bond borrowing and lending transactions,only cash is acceptable.In ordinary bond borrowing and lending transactions, no collateral is pledged to lenders.

11Types of bond transactions

Lending rate

Cash collateral

Cash collateralInterest

Borrower

Borrowing rate



Bonds

  


LenderBonds

REPO transactions

Ordinary transaction

Lender

Bonds

Securities collateral

Borrowing rate

Lending rate

Gensaki  

Bonds

Bonds
Trading value

Trading value

GENERAL STOCK LENDING

Buyer

Gensaki 

Seller

Bonds

Borrower

JSF(securities-collateral transaction)

In February 2002, we implemented offer-bid
borrowing and lending transactions (e Stock Lending)by expanding the online network that is linked withsecurities companies, so as to include institutional
investors, such as life and non-life insurance companies.
JSF procures stock certificates for lending frominstitutional investors such as life and non-life insurancecompanies. JSF also receives stock certificates in advancefor quick stock lending.

This business lends stock certificates needed to settle
trades to securities companies. A securities company
would use General Stock Lending when it has no stock
certificates on hand, for the purpose of hedge sale ofconvertible bonds or arbitrage transactions with spots andfutures, and so forth. JSF has done its utmost to increase
the number of eligible issues and shares for brokerage
services since the business was launched in 1977.

Mechanism of stock lending business

Stocks(deposit)

Stocklenders
Institutional
investors

Stocks(lend)

JSF
Borrowing fee

Collateral deposit

Lending fee

12

Securities
companies

OUR BUSINESS FIELDLOANS FOR NEGOTIABLE MARGIN TRANSACTIONS
Conditions of loans
Loanable stock Issues
In principle, loanable stock issues are those listed on
stock exchange. (However, they can be limited to those
we admit available.) Newly listed stocks can be acceptedfrom the 1st day of its listing.
Loan Period
In principle, the due date of loan is the day following thelending date, but it can be extended to the deferment
deadline for repayment of negotiable margin transactions
for securities companies.
Interest rate
The interest rate on loans is determined individually
between JSF and securities companies.
Collateral
JSF receive stock certificates purchased in negotiablemargin transactions and certain margin requirement
as collateral for loans. Margin requirement can besubstituted by a certain ratio of cash or by securities.

What is Loans for Negotiable Margin Transactions?
Loans for negotiable margin transactions is a system
which lends the necessary funds for securities companies
to purchase stocks in negotiable margin transactions onbehalf of its customer (3), receiving stock certificatespurchased (1) or certain margin requirement (2) ascollateral for loans.

Negotiable margin transactions and Loans for negotiable margin transactions
Negotiable margin transactions

Loans for negotiable margin transactions

Place an order for negotiablemargin buying

JSF

Loan funds forpurchasing stocks

Deposit margin requirement (2)Loan funds (3)Deposit stock certificatesas collateral (1)Payment for the purchaseReceive purchased stock certificates

Stock exchange
clearing facilities

13

Japan Securities Finance

Customer

Deposit margin requirement

Securities company

Application

OUR BUSINESS FIELD

BOND FINANCING
The aim of bond financing is to contribute to smooth
underwriting, circulation and fair price formation in bondmarkets. This business offers low-interest loans by using

government and other bonds as collateral to provide funds
required by securities companies in bond operations.

GENERAL LOANS
This business loans working funds required by securities
companies by using stocks, bond, and other securities as

collateral, and aims to respond quickly and flexibly to theneeds of securities companies.

SECURED LOANS ON SECURITIES FOR INDIVIDUAL AND CORPORATE INVESTORSJSF provides individual investors with direct loans
keeping securities as collateral, and safe keeping depositloans. JSF provides corporate investors, separately, withloans secured by securities.

Secured loans on securities for individual

Direct loans

Customers

Securities
companies  

14

JSF
Safe keeping deposit loans

CORPORATE GOVERNANCE

BASIC CONCEPT OF CORPORATE GOVERNANCE
Japan Securities Finance is constantly aware of its social responsibilities and public mission as an institution expert insecurities finance, and believes that firm establishment of social trust through sound business operations is management's
most important issue. To achieve this goal, the company continuously implements the following measures:･Active invitation of outside directors (three directors, three auditors)･Attendance of corporate auditors at internal meetings and instigation of necessary checks･Establishment and implementation of risk management policies･Establishment of compliance system
Furthermore, from the perspective of ensuring management transparency, we are committed to making active andtimely disclosure of management information that goes beyond legal requirements via our website.

Corporate Governance System Structure
Decision Making ofManagement
General Meetingof Shareholders
Board ofAuditors

Audit
Board of Directors

External
Financial
AuditorBusiness
Operation
Audit

President
Management Committee

Executive Officers
Meeting
Audit
Department

Audit
Subsidiaries

External Reportting
Contact Desk

Compliance
Committee

Executive Officers in Charge

Management
Administeration& Report. etc.

Mutual Check
Risk Management
Department

Affiliates

Business
Departments
and branches, etc.
Personnel in chargeof compliance

JSF Group
Company

15

Consultation and Report for Compliance

ReportCorporate
Auditors

All Depertment
and branches ,etc.

CORPORATE GOVERNANCECOMPLIANCE SYSTEM
The following details our compliance system and consulting and reporting system in regard to compliance.
The company's compliance system centers on our Board of Directors and the Compliance Committee. The situation
regarding internal compliance is constantly studied by the Compliance Committee and the results of the committee'sdeliberations are regularly reported to the Board of Directors. The Compliance Committee, chaired by the director in
charge of compliance, makes all possible efforts to promote and thoroughly establish compliance through such measures asurging managers and employees alike to take faithful and honest actions based on clear ethical standards.

Major activities of Compliance Committee･Annual drafting and implementation of compliance program･Drafting of compliance manual･Advice and guidance regarding compliance･Identification and evaluation of compliance system･Implementation of compliance education training
In addition, the company takes the initiative in the promotion of the establishment and strengthening of overall groupcompliance system.
Consulting and Reporting System Regarding Compliance
Establishment of an external reporting contact desk
From October 2004, in order to strengthen the compliance system, the company expanded its compliance consulting andreporting contact desk. In addition to the Compliance Committee and reception by personnel in charge of compliance, we
also established an external consulting and reporting contact desk.
This external consulting and reporting contact desk guarantees the complete anonymity of any person consulting
or reporting matters regarding the company, thereby reducing the psychological burden on those persons and making
consulting and reporting easier.

Consulting and Reporting
Board of Directors
President

Compliance Committiee
Chairnan : Director in charge of ComplianceComprehensive Compliance Section【General Affairs Department】
ReportReportPersonnel in charge of compliance    

    

Consult & report

External reporting
contact desk

Consult & reportManagers and employees     16

  

Consult&
reportRISK MANAGEMENTRISK MANAGEMENT
Basic Policies in Risk Management
With environmental changes such as financial deregulation and globalization as well as striking advances in information
technologies, risks which financial institutions face have become diversified and more complicated. Accordingly, risk
management has become more important in the management of financial institutions than ever before.
In this situation, in order to increase profitability while maintaining sound management, we have positioned risk
management at the highest priority and has established basic policies in risk management at our Board of Directors.
More precisely, we have established basic policies for risk management: "Keeping all employees informed of company'semphasis on risk management", "Proper management of each category of risk", "Promotion of integrated risk management","Establishing a system of mutual checks and balances", and so forth.
Methods for Risk Management
We classify expected risks broadly into 5 categories and then set these categories as management objectives: credit risks,market risks, liquidity risks, processing risks, and system risks. Among these categories, for credit risks and market risks,
we are striving to secure profits while quantitatively grasping the risks and controlling them within proper levels as
feasible for our management vitality (integrated risk management). On the other hand, for liquidity risks, processing risks
and system risks, we are taking preventive measures against occurrences of these risks by executing proper management
according to risk characteristics.

INTEGRATED RISK MANAGEMENT
Integrated risk management is a method to quantify various risks with unified methodology and to manage the total
amount of risks within the realm of management vitality.
For credit risks and market risks, after allocating risk capital to each risk operation department by risk category within
the realm of our own capital, we quantify risks with the methodology of Value at Risk (VaR) and manage the calculated
volume of risks within the range of that allocated risk capital.
Allocated amounts of risk capital are determined as final at the Management Committee, with prior deliberation at
regular "Risk Capital Meeting" in every March.
Each risk operation department controls the risks within the realm of the allocated risk capital. Risk Management
Department, which is independent of risk operation departments, quantifies the risks, monitors risk operation conditions,and reports to board members.
In case a possible rise for a risk may exceed the allocated amount of the risk capital, an extraordinary "Risk Capital
Meeting" will be held to deliberate responses to the case and then consult the Management Committee.

Risk Capital
Risk capital is capital necessary to cover losses caused by risks generated from business operation.
Value at Risk (VaR)
VaR is the maximum expected loss on an asset calculated with a certain period (holding period) and a certain probability(confidence level). This is calculated based on data in the past with statistical method. In our company, VaR is calculated
based on confidence level of 99% and holding period of 1 year.
Risk Capital Meeting
This is a meeting to deliberate issues such as allocated amount of risk capital and so forth. The meeting is organized by the
managers of Risk Management Department (chairperson), Planning Department, Treasury Department, and all the otherbusiness departments concerned.
Management CommitteThis is a committee to deliberate important matters concerning business execution. The committee is organized bydirectors who serve as the executive officers concurrently.

17

RISK MANAGEMENT SYSTEM    $       
 ! "  ! "       
     #   ! "     

 ! "     

  

 
  
      

       

  

・

・ 

 
     

  
・   
・   
・  
・  
・ 

18

Internal Audit Sector   


Audit Department

Risk
Categories
Risk Management
SectorRisk Operation Sector ! "          

Integrated Risk
Management Sector

Meetlng

Management RISK MANAGEMENTCREDIT RISK MANAGEMENT
Credit risks are the risks to suffer losses by decreasing or losing the values of the assets due to credit events such asdeterioration in the financial standing of a counterparty.
We try to sustain and improve the soundness of the assets by strictly managing overall credit risks.
More precisely, Risk Management Department assesses credit risks according to in-house ratings, and quantifies
and manages credit risks using a default rate for each in-house rating. Furthermore, to complement management by
quantification, we implement stress tests. On the other hand, for credit control, apart from screening client companies
and loan transactions by the Risk Management Department, each risk operation department sets and manages amounts
for transaction limitation for each client. In addition, each department implements rigid self-assessment of those assets forwhich they hold jurisdiction.
Additionally, for each loan transaction, as a general rule, we take adequate collateral. By implementing a daily marking
to the market of the relevant collaterals, we suppress occurrences of impaired loans. In a case where a borrower falls into
bankruptcy, by selling off collateral securities and so forth, we collect receivables in an expeditious manner.

In-house Rating System
We introduced a rating system which segmentalizes credit ratings of client companies into 6 ranks, based on ratings byexternal credit rating agencies, quantitative assessment of financial standing, obligor classifications used in self-assessment,
and so forth. With this system, we assess the levels of credit risks properly, quantify credit risks, and set up amount fortransaction limitation.
Stress Tests
Since VaR is statistical estimated figure, it cannot include possible losses, which can be caused by extreme market
fluctuation such as Black Monday or economic crisis (stress event). In this situation, to be prepared for unforeseeable
circumstances, we implement stress tests to calculate amount of losses in a case of occurrence of stress event based on datain the past or on hypothetical scenarios and assess the soundness of our financial management.

MARKET RISK MANAGEMENT
Market risks are risks to suffer losses caused by fluctuations of values of possessed assets (bond certificates, corporate stocks)
due to fluctuations of various market risk factors such as interest rates and prices of securities.
In our company, Risk Management Department quantifies and manages market risks, and to complement management
by quantification, it implements stress tests. Furthermore, to validate the reliability of the market risk quantification
model we are adapting, we are also implementing back testing to compare the calculated VaR with actual profits andlosses.

LIQUIDITY RISK MANAGEMENT
Liquidity risks are risks to suffer losses caused by failures of raising necessary funds or by procurement of funds withunusually high interest rates or risks caused by halt of transactions due to market disruptions or by forced transactions withunusually unfavorable prices.
In our company, the Treasury Department has jurisdiction over the management of liquidity risks and attempts todiversify procurement methods and to secure stable suppliers. As for cash flow management, while we are implementing
development of cash flow projection, grasping the amount which can be procured or liquidity of assets, and paying
attention to concentrated settlement dates for large capital, we have a system to report to our management with daily cash

19

RISK MANAGEMENT

flow status. Furthermore, to be prepared for unforeseeable circumstances, we take measures to supplement liquidity such as
possessing a certain amount of government bonds with high liquidity.
In addition, at the "ALM Committee " held in every quarter, we develop cash flow projection based on forecasts ofloans outstanding, deliberate policies for ALM (Asset Liability Management) such as revenue management for assets andliabilities of the company as a whole and thus report to the Management Committee.

ALM Committee
This is a committee to deliberate ALM such as development of fund management plans and revenue management for
assets and liabilities of the company as a whole. The committee is organized by the executive officer in charge of Treasury
Department, and managers of Treasury Department (chairperson) and all the other departments concerned.

PROCESSING RISK MANAGEMENT
Processing risks are risks to suffer losses from failed processing due to negligence, accidents or fraud by officers andemployees.
In our company, each department and branch has jurisdiction over the management of processing risks. To lessen
processing risks, through facilitation of regulations and manuals and also through trainings, all employees are familiarizedwith proper handling of operational work. In addition, by ensuring that each department and branch implements its own
voluntary inspection on a regular basis, we endeavor to prevent occurrence of accidents and improve our business processing
system.

SYSTEM RISK MANAGEMENT
System risks are risks to suffer losses due to system defects such as failures or malfunction of computer systems or due tounauthorized use of computer systems.
In our company, the Information Systems Planning Department holds jurisdiction over management of system risks.
To ensure stable operation of our computer systems, the department takes preventive measures for occurrence of system
failures such as duplicating networks and equipment and so forth. To develop and operate our computer systems safely andeffectively, all operation procedures are clarified and our monitoring system is facilitated. In addition, concerning protectionof our own information assets (information and information systems), necessary regulations are consolidated and all officers
and employees are familiarized with handling of the information assets. Furthermore, to minimize the effects of system
failures, measures are taken such as facilitation of various handling manuals, implementation of drills, and so on.

INTERNAL AUDITING SYSTEM
In our company, the Audit Department, which is independent from other departments, implements strict internal auditingof overall business operation on management status of each category of risk along with regulatory compliance status andvalidates the appropriateness and efficacy of our internal control system in each department.

20

BUSINESS RESULTS

JSF group companies recorded the consolidated
operating profits of 43,524 million yen (up 16.9%
year-on-year), the result of increased interest revenues
from loans for margin transactions. This was also due
to raised loan rates in response to higher short-term
interest rates, as well as to the increased coupon
income of JGBs. On the other hand, the consolidated
operating expenses rose 30.2% year-on-year to 24,922
million yen, due to increased interest payments
resulting from higher short-term interest rates, withthe general and administrative expenses totaling 8,959
million yen (down 2.2% year-on-year).

the consolidated recurring profits totaled 9,447 million
yen (up 13.9% year-on-year).
JSF posted 585 million yen in the extraordinary
profits attributable to the reversal of the allowance of
doubtful receivables and other factors, as well as 1,399
million yen in the extraordinary losses, resulting fromchanges in equity and other factors, in conjunction
with the establishment of a joint holding company
by Japan Information Processing Service Co., Ltd andJapan Securities Agents Ltd. and with partial sales of
JSF Information Technology Co., Ltd.’s equity. As aresult, the consolidated net income for the period was
4,156 million yen (down 16.1% year-on-year).

As a result, the consolidated operating profits
totaled 9,642 million yen (up 8.0% year-on-year), andBreakdown of JSF group operating revenues

Securities financing business
Loans for margin transactions

Interest on loans
Interest on collateral money for securities borrowed
Fees on lending securities
Bond financing and general loans
Interest on bond financing
Interest on general loans
Securities lending
Stocks
Bonds
Fees on lending
Interest on collateral money for securities borrowed
Trust banking
Interest on loans
Trust charges
Real estate leasing
Other businessInformation processing business
Fees on information services
Fees on machinery leasing
OthersTotal operating revenues

21

2007
(April 1, 2006 March 31, 2007)
Amount(¥ million)

2006(April 1, 2005 March 31, 2006)
Amount(¥ million)

42,91423,187
10,954
1,345
10,225
1,254
4
1,250
5,093
1,442
3,651
986
2,665
6,981
2,964
178
1,015
5,384
610
583
15
12
43,524

34,23422,993
10,158893
11,226
865
7
858
2,700
1,465
1,235
929
306
4,287
1,382
161
871
2,518
2,992
2,726
78
188
37,226SECURITIES FINANCE BUSINESSOperating revenues from securities finance business increased to 43,524 million yen (up 16.9% year-on-year).
Loans for Margin Transactions
In margin loan business, although the outstanding balance of loans for margin transactions during the fiscal year averaged
1,444.3 billion yen - a decrease of 193.3 billion yen by comparison with the previous fiscal year – the revenues frominterest on loans increased, due to the rise in interest rates on loans. On the other hand, while the average outstandingbalance of stock loans for margin transactions during the fiscal year increased by 72.7 billion yen from the previous year to723.8 billion yen, the fees on lending securities decreased, due to the decrease of over-lent issues. As a result, the operating
revenues from loans for margin transactions totaled 23,187million yen, up 0.8% on the previous fiscal year’s figures.

Average balance of loans

Average balance of stock loans（Billions of yen）
1,800

（Billions of yen）
800

1,638

1,600
1,400

600

1,099

1,200

540

504

538

400

800

651

300

600

409

200
100

200
0

651

500

1,000

400

724

700

1,444

03

04

05

06

0

07

03

04

05

06

07

Bond Financing and General Loans BusinessIn bond financing and general loans business, although growth in loan to individual investors and non-financial companies
was sluggish, the outstanding balance of loans for negotiable margin transactions to securities companies has grownsteadily. As a result, the average outstanding of bond financing and general loans were respectively 0.8 billion yen and78.6 billion yen (of which that of negotiable margin transactions represented 33.7 billion yen) during the fiscal year,
resulting in the operating revenues of 1,254 million yen for this business (up 45.0 % year-on-year).
Average balance of bond financing

Average balance of general loans（Billions of yen）

（Billions of yen）

10
8

78.6

80
70

7.9

60
50

6

3.7

4

45.7

42.5

41.8

04

05

44.6

40

3.5

30

1.8

2

0.8

20
10

0

03

04

05

06

0

07

22

03

06

07

BUSINESS RESULTS

Securities Lending Business
As regards securities lending business, in bond trading department, the trading volume during the fiscal year amounts to
246,585.6 billion yen, mainly resulting from increased GC transactions (transactions in unspecified issues), and the trading
rates were also increased due to the BOJ’s two interest rate rises. In stock lending department, as in the previous fiscal year,
we experienced a brisk demand for stock borrowing in order to avoid fails in delivery. As a result, the operating revenues
from this business totaled 5,093 million yen (up 88.6% year-on-year).
Trading volume of general stock lending

Trading volume of bond lending（Billions of yen）

（Billions of yen）

995

1,000

1,057
200,000

800
600

616

680

664

175,075

150,000
100,000

82,577400
50,000200
0246,586

250,000

1,200

03

04

05

06

0

07

41,05303

35,509
04

05

06

07

Trust Banking BusinessIn trust banking business, the average outstanding loan balance for the fiscal year was 711.9 billion yen, a fall of 304.5
billion yen from the previous fiscal year’s figure. Despite our efforts to increase syndicated loans, this was due primarily tothe fall in government loans. Nonetheless, the revenues from interest on loans increased dramatically, thanks to the rise ininterest rates, and resulted in an increase in operating revenues to 6,981 million yen (up 62.9% year-on-year).

Other BusinessIn respect of other revenues, the company recorded a figure of 5,993 million yen (up 8.8% year-on-year) due to theincreased coupon income on JGBs.
In information processing service business, for which JSF Information Technology Co., Ltd. was responsible until thefirst quarter of fiscal 2006, the company is no longer our consolidated subsidiary, following the partial sale of its shares in
July 2006. Therefore, its operating revenues of 610 million yen as a former consolidated subsidiary are included in the
figures for other revenues.

23

FINANCIAL SECTIONCONSOLIDATED BALANCE SHEETSJapan Securities Finance Co., Ltd. and Consolidated Subsidiaries as of March 31, 2007 and 2006
Thousands of
U.S. dollars(note 2)
2007

Millions of yen

Assets2007

2006

Current assets:

Cash (note 3)

￥

4,858

￥

3,824

$

41,152

Call loans

130,200

118,000

1,102,922

Short-term investments (notes 4 and 15)

898,761

1,365,935

7,613,393

2,028,633

3,194,928

17,184,524

Securities lent

713,295

705,151

6,042,313

Securities in custody (note 15)

161,317

193,722

1,366,514

Securities in deposit (note 15)

1,114,258

1,740,415

9,438,865

697

856

5,904

1,919,195

1,662,232

16,257,476

30,77842,625

260,720(734)(1,307)(6,218)7,001,258

9,026,381

59,307,565

8,102

7,696

68,632‒2‒

Tools, furniture and fixtures

1,260

2,132

10,673

Land

3,316

3,324

28,0903397

25

12,681

13,551

107,420(5,466)(6,020)(46,302)

7,215

7,531

61,118

2,797

3,838

23,693404,884

669,067

3,429,767

Deferred tax assets (note 9)

4,377

7,465

37,077

Other investments and other assets

2,683

8,142

22,728

Allowance for doubtful receivables

(34)

(41)

(288)

411,910684,633

3,489,284￥7,423,180￥9,722,383$ 62,881,660

Short-term loans receivable (note 15)

Deferred tax assets (note 9)
Collateral money for securities borrowed (note 15)
Other current assets
Allowance for doubtful receivables
Total current assets
Property, plant and equipment:

Buildings and structures
Machinery, equipment and vehicles

Construction in progress
Accumulated depreciation
Net property, plant and equipment
Intangible assets, net
Investments and other assets:

Investments in securities (notes 4, 5 and 15)

Total investments and other assets
Total assets
See accompanying notes to consolidated financial statements.

24

FINANCIAL SECTION

Millions of yen

Liabilities and Net Assets
Current liabilities:
Call money (notes 7 and 15)
Bills sold (notes 7 and 15)
Short-term borrowings (notes 7 and 15)
Commercial paper (note 7)
Payables under repurchase agreements (notes 7 and 15)
Accrued income taxes (note 9)
Collateral money received for securities lent (note 15)
Collateral securities deposited
Securities borrowed (note 15)
Securities lent opposite account
Other current liabilities (note 7)
Total current liabilities

2007

￥

2,191,400‒
802,530
110,000
96,7382,945
1,949,169
1,634,701
349,645
4,526
94,625
7,236,279

2006￥

1,964,400
672,400
1,577,820‒
114,420
1,845
2,462,857
2,328,083
302,380
8,825
153,828
9,586,858

Thousands of
U.S. dollars(note 2)
2007$

18,563,321‒
6,798,221
931,808
819,466
24,947
16,511,385
13,847,531
2,961,838
38,340801,567
61,298,424

Non-current liabilities:

Long-term borrowings (note 7)
Deferred tax liabilities (note 9)
Deferred tax liabilities for land revaluation (note 6)
Liabilities for retirement and severance benefits (note 8)
Other non-current liabilities
Total non-current liabilities
Total liabilities

60,000
188
99
2,991
747
64,025

4,500
‒
99
3,924
8,040
16,563508,259
1,592
839
25,337
6,328
542,355

7,300,304

9,603,421

61,840,779

10,00010,00084,7105,182
111,252
(457)

5,182
109,872(484)

43,897
942,414(3,871)

125,977

124,570

1,067,150(3,244)143(3,101)(5,751)143(5,608)(27,480)
1,211(26,269)

122,876

118,962

1,040,881

7,423,180￥ 9,722,383

Stockholders’ equity:

Common stock (note 10):
Authorized 200,000,000 shares ; issued 99,704,000
shares in 2007 and 2006
Additional paid-in capital (note 10)
Retained earnings (note 11)
Treasury stock, at cost; 977,940 shares in 2007
and 1,104,905 shares in 2006
Total Stockholders’ equity
Valuation and translation adjustments:

Net unrealized loss on other securities (note 4)
Gain on revaluation of land (note 6)
Total valuation and translation adjustments
Total net assets
Commitments and contingencies (note 17)

Total liabilities and net assets

￥

25

$

62,881,660

CONSOLIDATED STATEMENTS OF INCOME

Japan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2007 and 2006
2006

Thousands of
U.S. dollars(note 2)
2007

37,226$

Millions of yen
2007

Operating revenues￥

43,524￥

368,691

Operating expenses

24,923

19,142

211,122

Operating profit

18,601

18,084

157,569

8,959

9,157

75,892

9,642

8,927

81,677

Interest income

13

9

110

Dividend income

97

66

822

Interest expenses

(1)

(3)

(9)

Equity in losses of affiliates

(432)

(815)

(3,659)

Reversal of allowance for doubtful receivables

576

18

4,879

Dilution loss from changes in equity interest(1,276)‒(10,809)

15

(15)

127

(1,008)(740)(8,539)

8,634

8,187

73,138Current

4,317

2,997

36,569Deferred

161

237

1,364

4,478

3,234

37,933General and administrative expenses (note 12)
Operating income

Other income (deductions):

Other, net

Income before income taxes

Income taxes (note 9)￥

Net income
See accompanying notes to consolidated financial statements.

26

4,156

￥

4,953

$

35,205

FINANCIAL SECTIONCONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

Japan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2007 and 2006
Millions of yen
Commonstock(note 10)

Balance at March 31, 2005
Changes arising during year:
Cash dividends
Bonuses to directors andcorporate auditors
Net income
Addition of revaluation of land
Other, net
Total changes during the year

Balance at March 31, 2006
Changes arising during year:
Cash dividends
Bonuses to directors and corporate
auditors
Net income
Increased earnings of spin-off
Decreased earnings of excluded
consolidated company
Acquired treasury stock
Decreased treasury stock ofsubsidiary
Net amount of change out ofstockholders’ equity
Total amount of change
Balance at March 31, 2007

￥ 10,000 ￥ 5,182 ￥107,473 ￥‒10,000Cash dividendss
Bonuses to directors and corporate
auditors
Net income
Increased earnings spin-off
Decreased earnings of excluded
consolidated company
Acquired treasury stock
Decreased treasury stock ofsubsidiary
Net amount of change out ofstockholders’ equity
Total amount of change

Balance at March 31, 2007

‒
5,182

Total

Valuation and translation adjustments
Net unrealized Gain on
Total net
Total
gain on other revaluation
assetsof landsecurities(note 4)(note 6)(253) ￥122,402 ￥ 3,784 ￥151 ￥ 3,935 ￥126,337(2,389)(172)(2,389)(172)(2,389)
(172)

4,953
7

4,953
7
(231)
2,168
124,5704,953
7(9,774)(7,375)
118,962

2,399
109,872

(231)
(231)
(484)

(9,535)(9,535)(5,751)

(8)
(8)
143

(9,543)(9,543)(5,608)(2,583)(123)(2,583)(123)(2,583)
(123)

4,156
394
(464)

4,156
394
(464)

4,156
394
(464)

(12)
39

(12)
39

(12)
39

2,507
1,407
2,507
1,380
27
‒
‒
￥ 10,000 ￥ 5,182 ￥111,252 ￥ (457) ￥125,977 ￥ (3,244) ￥Commonstock

Balance at March 31, 2006
Changes arising during year:

Stockholders’ equity
Additional
Retained
Treasurypaid-inearnings
stock
capital(note 10)
(note 11)

2,507

2,507

3,914
‒
2,507
143 ￥ (3,101) ￥122,876

Thousands of U.S. dollars(note 2)
Stockholders’ equity
Valuation and translation adjustments
Additional
Net unrealized Gain on
Total net
Retained
Treasury
Total
Total
paid-ingain on other revaluation
assetsearnings
stockof landcapitalsecurities$ 84,710 $ 43,897 $930,724 $ (4,100) $1,055,231 $ (48,716) $1,211 $(47,505) $1,007,726(21,881)(1,042)(21,881)(1,042)(21,881)(1,042)35,205
3,338(3,930)35,205
3,338(3,930)35,205
3,338(3,930)

(102)
331

(102)
331

(102)
331

21,236
11,91921,236229‒‒ 11,690$ 84,710 $ 43,897 $92,414 $ (3,871) $1,067,150 $ (27,480) $See accompanying notes to consolidated financial statements.

27

21,236

21,23633,155‒ 21,236
1,211 $(26,269) $1,040,881

CONSOLIDATED STATEMENTS OF CASH FLOWSJapan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2007 and 2006
Millions of yen
2007

2006

Thousands of
U.S. dollars(note 2)
2007

Cash flows from operating activities:

Income before income taxes￥ 8,634
Adjustments to reconcile income before income taxes to net
cash provided by (used in) operating activities:
Depreciation and amortization
1,649
Losses relating to short-term investments and investments
3,235
in securities
Allowance for doubtful receivables(577)
Decrease in liabilities for retirement and severance benefits(274)Interest and dividend income(27,527)
Interest expenses
11,198Equity in losses of affiliates
432
Dilution loss from changes in equity interest
1,276(Increase) decrease in short-term loans receivable
1,165,795(Increase) decrease in call loans(12,200)(Increase) decrease in collateral money for securities borrowed(256,963)
Increase in call money
227,000
Decrease in bills sold(672,400)
Increase (decrease) in borrowings(775,280)
Increase (decrease) in payables under repurchase agreements(17,681)
Increase (decrease) in commercial paper
110,000
Increase (decrease) in collateral money received for(513,688)
securities lent
Increase (decrease) in collateral money received for loan
(33,860)transactions
Purchase of short-term investments(8,623,903)
Proceeds from sale/redemption of short-term investments
9,352,511
Other, net
42,698Sub total(9,925)Interest and dividend received
27,009Interest paid
(10,227)
Income taxes paid
(3,247)
Income taxes refunded893
Net cash provided by (used in) operating activities
4,503

￥

8,187

$

73,138

1,627
2,380

13,96927,404(21)(229)(16,481)
1,529
815
‒
(666,853)
18,000369,675
554,200(1,462,700)
618,000
87,723(172,000)
134,261(4,888)(2,321)(233,181)
94,8583,659
10,8099,875,434(103,346)(2,176,730)
1,922,914(5,695,892)(6,567,387)(149,775)
931,809(4,351,444)

24,773(286,828)(6,846,295)
7,173,246
72,341(97,822)
16,551(1,553)(4,941)‒(87,765)(73,052,969)
79,224,998
361,694(84,075)
228,793(86,633)(27,505)
7,565
38,145

(375)
0
(309)
(195)
116
(763)

(157)
100
(1,110)(580)(0)(1,747)(3,177)0(2,617)(1,652)
983(6,463)

Dividends paid to stockholders
Other, net
Net cash used in financing activities(2,583)(11)(2,594)(2,389)(231)(2,620)(21,881)(93)(21,974)

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents of subsidiaries excluded fromconsolidation
Cash and cash equivalents at end of year (note 3)

1,146
3,824
(112)

(92,132)
95,956‒

9,708
32,393(949)

Cash flows from investing activities:

Purchase of investments in securities
Proceeds from sale/redemption of investments in securities
Capital expenditures
Purchase of intangible assets
Other, net
Net cash used in investing activities
Cash flows from financing activities:￥

See accompanying notes to consolidated financial statements.

28

4,858

￥

3,824

$

41,152

FINANCIAL SECTIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Japan Securities Finance Co., Ltd. and Consolidated Subsidiaries(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Basis of Presenting Consolidated
Financial Statements
Japan Securities Finance Co., Ltd. (the Company) and its
consolidated subsidiaries maintain their books of accountand prepare their financial statements in conformity withfinancial accounting standards of Japan.
The accompanying consolidated financial statements
have been prepared in accordance with the provisions set
forth in the Japanese Securities and Exchange Law and its
related accounting regulations, and in conformity withaccounting principles and practices generally acceptedin Japan, which may differ in certain respects fromaccounting principles and practices generally accepted incountries and jurisdictions other than Japan.
In preparing the accompanying consolidated financial
statements, certain reclassifications have been made in
the financial statements issued domestically in Japan inorder to present them in a form which is more familiar
to readers outside Japan. In addition, the notes to theconsolidated financial statements include information
which is not required under accounting principles
generally accepted in Japan but is presented herein as
additional information.
(b) Principles of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries(2 subsidiaries for 2007 and 3 subsidiaries for 2006).
All significant intercompany accounts andtransactions have been eliminated in consolidation.
Investments in affiliates are accounted for by theequity method.
The Accounting Standards for Consolidation require
the control or influence concept for the consolidation
scope of subsidiaries and affiliates. Under the control
or influence concept, a company in which the parent
company or its consolidated subsidiaries, directly or
indirectly, are able to exercise control over operations isfully consolidated, and a company over which the parent
company and/or its consolidated subsidiaries have theability to exercise significant influence is accounted for by
the equity method.
The difference between the cost and the underlying
net assets at the date of investments in subsidiaries oraffiliates is allocated to identifiable assets and liabilities
based on fair market value at the date of investments.
The unallocated portion of the difference, which isrecognized as goodwill or negative goodwill, is amortizedover 5 years.
As a result of the shares exchange described in note
18, JSF Information Technology Co., Ltd. (JSFIT) which

was formerly a consolidated subsidiary of the Company
became an affiliate, and the statement of income of JSFIT
was consolidated during the time JSFIT was a subsidiary.
Japan Information Processing Service Co., Ltd. (JIPS)
and Japan Securities Agents, Ltd. (JSA) established a joint
holding company, JBIS Holdings Inc. (JBIS) by transfer
their shares on October 1, 2006, and JBIS has been an
affiliate of the Company accounted for by the equity
method.
(c) Cash and Cash Equivalents
For the purpose of the statements of cash flows, theCompany considers all highly liquid investmentswith insignificant risk of changes in value which havematurities of generally three months or less whenpurchased to be cash equivalents.
(d) Short-term Investments and Investments in
Securities
Under the Accounting Standards for Financial Instruments,
securities are classified into four categories – “trading
securities”, “held-to-maturity securities”, “investments inaffiliates” and “other securities”. Securities classified as“trading securities” are stated at fair value and unrealized
gains or losses are recorded in the consolidated statement ofincome. Securities classified as “held-to-maturity securities”
are stated at amortized cost. Securities classified as “othersecurities” with fair value are stated at fair value andunrealized gains or losses, net of related taxes, are excluded
from earnings and recorded in a separate component of net
assets. Realized gains or losses on the other securities are
determined by the moving average method. Bond securities
classified as “other securities” for which fair value is notavailable are stated at the amortized cost. Equity securities
classified as “other securities” for which fair value is notavailable are stated at the moving-average cost.
(e)Inventories
Inventories are stated at cost. Cost is determinedprincipally by the specific identification method.
(f) Property, Plant and Equipment
Property, plant and equipment are carried at cost.
Depreciation is provided principally by the declining-balancemethod based on the estimated useful lives.
The estimated useful lives are as follows:
Buildings and structures 3–50 years(g) Intangible Assets
Intangible assets are carried at cost less amortization.
Software development expenses are deferred and amortizedby the straight-line method over estimated useful lives (5years). Intangible assets other than software are deferred andamortized by the straight-line method at rates based on theestimated useful lives of the respective assets.

29

(h) Allowance for Doubtful Receivables
An allowance for doubtful receivables is provided at an
amount of uncollectible receivables based on historicalloss ratios and an amount that takes into consideration
the possibility of specific liabilities.
(i) Retirement and Severance Benefits
The Company and its consolidated subsidiaries haveretirement benefit plans covering substantially all
employees.
Under the Accounting Standards for Retirement andSeverance Benefits, provisions have been made in theaccompanying consolidated financial statements basedon the present value of the projected future retirement
and severance benefits attributable to employee services
rendered by the end of the year, less amounts funded
under contributory and noncontributory pension plans.
(j) Leases
Finance leases, except for those where the legal title ofthe underlying property is transferred from the lessor to
the lessee at the end of the lease term, are accounted forsimilarly to operating leases.
(k) Income Taxes
The Accounting Standards for Deferred Income Taxes
require that deferred income taxes should be accounted
for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the expected
future tax consequences of events that have been includedin the financial statements or tax returns. Under thismethod, deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled, and the effect ondeferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes theenactment date.
(l) Directors’ Bonus
Effective from the year ended March 31, 2007, theCompany and its domestic consolidated subsidiaries
adopted the “Accounting Standard for Directors’ bonus”(Accounting Standards Board of Japan Statement No.
4, issued by Accounting Standards Board of Japan on
November 29, 2005).

According to the standard, directors’ bonuses
are accounted for as an expense when such bonuses
are accrued, instead of being accounted for as an
appropriation of retained earnings upon approval at
general meeting of stockholders. The effect of adoptionof the new standard was to decrease income before income
taxes and minority interests by ¥156 million ($1,321
thousand).
(m) Presentation of Net Assets on Balance Sheet
Effective from the year ended March 31, 2007, theCompany adopted the “Accounting Standard for
Presentation of Net Assets in the Balance Sheet”(Accounting Standards Board of Japan Statement No.
5, issued by Accounting Standards Board of Japan on
December 9, 2005) and the “Guidance on AccountingStandard for Presentation of Net Assets in the Balance
Sheet” (Accounting Standards Board of Japan Guidance
No. 8, issued by Accounting Standards Board of Japan on
December 9, 2005).
According to the standards, former “Stockholders’equity” is presented as “Net assets” and classified into
“Stockholders’ equity” and “Valuation and translation
adjustments.” The stockholders’ equity amounted to¥122,876 million ($1,040,881 thousand) based on theformer classification.
(n) Impairment of Long-lived Assets
Effective April 1, 2005, the Company and its consolidated
subsidiaries adopted a new accounting standard forthe impairment of fixed assets (“Opinion Concerning
the Establishment of an Accounting Standard for the
Impairment of Fixed Assets” issued by the BusinessAccounting Deliberation Council on August 9, 2002)
and the “Implementation Guidance on the AccountingStandard for the Impairment of Fixed Assets” (BusinessAccounting Standard Implementation Guidance No. 6
issued on October 31, 2003). The effect of adoption ofthese new standards was nil.
(o) Reclassifications
Certain reclassifications have been made to the prioryears’ consolidated financial statements to conform to thepresentation used as of and for the year ended March 31,
2007.

(2) FINANCIAL STATEMENT TRANSLATIONThe consolidated financial statements are expressed in Japanese yen. However, solely for the convenience of the reader,the consolidated financial statements as of and for the year ended March 31, 2007 have been translated into United States
dollars at the rate of ¥118.05=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market on March
30, 2007. This translation should not be construed as a representation that the amounts shown could be converted into
U.S. dollars at such rate.

(3) CASH AND CASH EQUIVALENTS
A reconciliation between “Cash” in the accompanying consolidated balance sheets and “Cash and cash equivalents” in theaccompanying consolidated statements of cash flows as of March 31, 2007 and 2006 are as follows:
Thousands ofMillions of yen
2007

Cash
Cash and cash equivalents

￥
￥

30

4,858
4,858

￥
￥

2006

U.S. dollars
2007

3,824
3,824

$
$

41,152
41,152

FINANCIAL SECTION(4) SHORT-TERM INVESTMENTS AND INVESTMENTS IN SECURITIESAs of March 31, 2006, the Company held no trading securities. Balance sheet amount and net unrealized loss which arecharged to income of trading securities as of March 31, 2007 are ¥59,935 million ($507,709 thousand) and ¥25 million($212 thousand), respectively.
Balance sheet amount, gross unrealized gain or gross unrealized loss and fair value of held-to-maturity securities as ofMarch 31, 2007 and 2006 are summarized as follows:
Balance sheet amountMarch 31, 2007
Government bond securities
Corporate bond securities
OthersMarch 31, 2006
Government bond securities
Corporate bond securities
OthersMarch 31, 2007
Government bond securities
Corporate bond securities
OthersMillions of yen
Gross unrealized gain
Gross unrealized loss

15
6,700
−
6,715

￥

￥

15
−

￥

￥

15

￥
￥

￥
￥

￥

−
70
−
70

￥

−
−
−
−

￥

￥

￥

−
−
−
−

￥

−
−
−
−

￥

Balance sheet amountThousands of U.S. dollars
Gross unrealized gain
Gross unrealized loss

$

$

127
56,756−56,883

$

$

−
593
−
593

$
$

Fair value

−
−
−
−

￥

15
6,770
−
6,785
15
−
−
15

￥

Fair value

$
$

127
57,349−57,476

Acquisition cost, gross unrealized gain or gross unrealized loss and balance sheet amount of other securities with fair value
as of March 31, 2007 and 2006 are summarized as follows:
Millions of yen
Gross unrealized gain
Gross unrealized loss

Balance sheet amount

￥

4,961

￥

1,164,307
66,928−47￥ 1,232,830￥

Acquisition cost

March 31, 2007

Equity securities
Bond securities:
Government bond securities
Corporate bond securities
OthersOther securities
March 31, 2006

Equity securities
Bond securities:
Government bond securities
Corporate bond securities
OthersOther securities

￥

1,548

1,234

1,974,980
10,000−80￥ 1,986,294

Acquisition cost

￥

−

6,509

￥

1,089
12
−
40
6,102

￥

13,6383−−
13,641

￥

5,898

￥

−

￥

234
−
−
29
6,161

￥

20,884
3−−
20,887

1,954,330
9,997
−
109
￥ 1,971,568

Thousands of U.S. dollars
Gross unrealized gain
Gross unrealized loss

Balance sheet amount$

42,025

$

$

9,225
101
−
339
51,6901,151,758
66,937−87￥ 1,225,291
￥

7,132

March 31, 2007

Equity securities
Bond securities:
Government bond securities
Corporate bond securities
OthersOther securities$

13,1139,862,830
566,946−398$ 10,443,287

31

$

−

$

115,528
25−−
115,553

55,1389,756,527
567,022−737$ 10,379,424

It is not practicable to estimate the fair value of securities as of March 31, 2007 and 2006 described bellow because of lackof market price and difficulty in estimating fair value.
Thousands of
U.S. dollars
2007

Millions of yen
2007

Unlisted equity securities
Commercial paper

￥

727
−

2006

￥

727
47,992$

6,158−

Projected future redemption of other securities with maturities and held-to-maturity securities as of March 31, 2007 issummarized as follows :Due within one year

Millions of yen
Due after one year
Due after five years
through five years
through ten years

Due after ten years

Bond securities:

Government bond securities
Corporate bond securities
Others￥ 771,889
66,937−￥ 838,826￥ 60,385
6,700−￥ 67,085

Due within one year

￥ 59,940−−￥ 59,940￥ 259,558−−￥ 259,558

Thousands of U.S. dollars
Due after one year
Due after five years
through five years
through ten years

Due after ten years

Bond securities:

Government bond securities
Corporate bond securities
Others$ 6,538,662
567,022−$ 7,105,684$ 511,520
56,756−$ 568,276$ 507,751−−$ 507,751$ 2,198,712−−$ 2,198,712

For the years ended March 31, 2007 and 2006, proceeds from sale of other securities are ¥6,325,438 million ($53,582,702
thousand) and ¥4,449,469 million, the gross realized gains are ¥297 million ($2,516 thousand) and ¥1,722 million, and thegross realized losses are ¥3,636 million ($30,801 thousand) and ¥4,243 million, respectively.

(5) INVESTMENTS IN AFFILIATES
The aggregate carrying amount of investments in affiliates as of March 31, 2007 and 2006 are ¥10,978 million ($92,994
thousand) and ¥14,701 million, respectively.

(6) LAND REVALUATIONAs of March 31, 2002, the Company revaluated its land at fair value, pursuant to the Enforcement Ordinance for the Law
Concerning Land Revaluation and its amendments (the “Law”). According to the Law, net unrealized gain is reported ina separate component of net assets, net of related taxes, and the related deferred tax liabilities are reported in liabilities asdeferred tax liabilities for land revaluation.
The value of the land at March 31, 2007 decreased by ¥148 million ($1,254 thousand) in comparison with the book valueof the land after the revaluation.

(7) DEBTThe composition of debt and the weighted average interest rate on debt as of March 31, 2007 and 2006 are as follows:
Millions of yen

Thousands of U.S. dollars￥ 802,530
60,0002,191,400
110,000
96,739494￥ 3,261,163$ 6,798,221
508,259
18,563,321
931,808
819,475
4,185$ 27,625,269

Weighted average rate

March 31, 2007

Short-term borrowings
Long-term borrowings
Call money
Commercial paper
Payables under repurchase agreements
Other

32

0.563%
0.787
0.550
0.619
0.651
1.375

FINANCIAL SECTION

Millions of yen

Weighted average rate

￥ 1,577,820
4,500
1,964,400
672,400
114,420
1,914￥ 4,335,454

0.067%
0.194
0.021
0.016
0.087
1.375

March 31, 2006

Short-term borrowings
Long-term borrowings
Call money
Bills soldPayables under repurchase agreements
Other(8) RETIREMENT AND SEVERANCE BENEFITSThe Company has defined benefit retirement and pension plans, which consist of tax qualified noncontributory pension
plans and unfunded retirement and severance plans that provide for lump-sum payment of benefits, and a noncontributory
defined contribution plan. The Company was a member of the welfare pension plan administrated by the Japan Securities
Dealers Employees Pension Fund, and on March 25, 2005, the Fund obtained the approval for its liquidation from the
Minister of Health, Labour and Welfare.
The consolidated subsidiaries have defined benefit retirement and pension plans, which consist of contributory
benefit plans provided under the Welfare Pension Insurance Law of Japan, tax qualified noncontributory pension plans
and unfunded retirement and severance plans that provide for lump-sum payment of benefits, and noncontributory
defined contribution plans. The welfare pension plan consisted of two tiers, the substitution portion of Japanese Welfare
Pension Insurance and the corporate portion which was established as an industry-wide multi-employer noncontributory
plan. The welfare pension plans are administrated by The Zenkoku Joho Service Sangyo Kosei Nenkin Kikin (JJK: theJapan Information Service Industry Welfare Pension Fund), etc. The plan assets of such welfare pension funds cannot be
specifically allocated to the individual participants nor to the substitution and corporate portions. However, based on thesubsidiaries’ proportion of the contribution to the aggregate pension contributions, the plan assets amounts at March 31,
2006 ware estimated to be ¥938 million. As at March 31, 2007, one subsidiary has the welfare pension plan administrated
by JJK, and based on the subsidiary’s proportion of the contribution to the aggregate pension contributions, the plan asset
amount at March 31, 2007 is estimated to be ¥140 million ($1,186 thousand).
The funded status of the pension plans as of March 31, 2007 and 2006 is outlined as follows:
2007

2006

Thousands of
U.S. dollars
2007￥ (6,296)
3,469(2,827)430(2,397)−￥ (2,397)￥ (7,677)
3,929(3,748)534(3,214)51￥ (3,265)$ (53,333)
29,386(23,947)
3,642(20,305)−$ (20,305)

Millions of yen

Projected benefit obligation
Plan assets at fair value
Funded status
Unrecognized actuarial loss
Net amount recognized in the consolidated balance sheets
Prepaid retirement and severance benefits
Accrued retirement and severance benefits

Net periodic pension cost for the years ended March 31, 2007 and 2006 consists of the following components:
Millions of yen
2007

Service cost
Interest cost
Expected return on plan assets
Amortization of actuarial loss
Net periodic pension cost

￥

￥

174
126
(82)
81
299

2006

￥

￥

240
159
(71)
169
497

Thousands of
U.S. dollars
2007

$

$

1,474
1,067
(694)
686
2,533

Significant assumptions of pension plans used to determine these amounts in fiscal 2007 and 2006 are as follows:
Periodic allocation method for projected benefit
Discount rate
Expected rate of return on plan assets
Period for amortization of unrecognized actuarial loss
Note: *Amortized in the year in which they were generated

33

2007

2006

Straight-line
2.0%
2.5%
15 years

Straight-line
Mainly 2.0%
Mainly 2.5%
Mainly 15 years

Directors and corporate auditors are not covered by the plans described above. For such persons, the Company had
unfunded defined benefit pension plan. Under the plan, directors and corporate auditors are entitled to lump-sum
payments based on the current rate of pay and length of service when they leave the Company. The Company provides
for the amount of the vested benefits to which directors and corporate auditors are entitled if they were to retire or severimmediately at the balance sheet dates. At the general meeting of stockholders held on June 28, 2006, abolishment of
retirement benefit system for directors and corporate auditors was approved, and directors and corporate auditors wereentitled to lump-sum payment up to the date of the abolishment when they leave the Company. The amount to be paidis ¥389 million ($3,295 thousand). Certain subsidiaries still have unfunded defined benefit pension plans for directors
and corporate auditors. Under the plans, directors and corporate auditors are entitled to lump-sum payments basedon the current rate of pay and length of service when they leave the subsidiaries. As of March 31, 2007 and 2006, theliabilities for retirement and severance benefits related to the plans were ¥594 million ($5,032 thousand) which include the
lump-sum payments mentioned above, and ¥659 million, respectively.

(9) INCOME TAXESThe Company and its consolidated subsidiaries are subject to Japanese corporate, inhabitant and business taxes based on
income which, in the aggregate, result in a statutory tax rate of approximately 40.7% in 2007 and 2006.
The reconciliation of the statutory tax rate and the effective tax rate as a percentage of income before income taxes forthe year ended March 31, 2007 is follows :Statutory tax rate

40.7%
6.0
2.1
1.9
0.6
(3.8)
4.3
51.8%

Dilution loss from changes in equity interest
Equity in losses of affiliates
Gain on sale of associated company
Expenses not deductible for tax purposes
Income not credited for tax purposes
Other
Effective tax rateSignificant components of deferred tax assets and liabilities at March 31, 2007 and 2006 are as follows:
Thousands of
U.S. dollars
2007

Millions of yen
2007

2006

Deferred tax assets:

Accrued business tax
Accrued bonuses
Liabilities for retirement and severance benefits (employees)
Liabilities for retirement and severance benefits (directors and corporate auditors)
Allowance for doubtful receivables
Net unrealized loss on other securities
Other

￥

215
173
965
242
239
5,552
169
7,555

￥

184
241
1,226
268
458
8,501
218
11,096

$

1,821
1,465
8,174
2,050
2,025
47,031
1,432
63,998(182)(2,508)(85)(2,775)8,321(1,542)(21,042)(25)(22,609)$ 41,389

Deferred tax liabilities:

Gain on evaluation of subsidiaries’ assets
Net unrealized gain on other securities
Other
Net deferred tax assets

￥

34

(182)
(2,484)(3)(2,669)4,886￥

FINANCIAL SECTION

Net deffered tax assets and liabilities as of March 31, 2007 and 2006 are reflected in the accompanying consolidatedbalance sheets under the following captions:Thousands of
U.S. dollars
2007

Millions of yen
2007￥

Current assets - Deferred tax assets
Investments and other assets- Deferred tax assets
Non-current liabilities- Deferred tax liabilities

697
4,377
(188)

2006

￥

856
7,465
̶

$

5,904
37,077(1,592)(10) COMMON STOCKOn May 1, 2006, a new corporation law (the "Corporation Law") became effective, which reformed and replaced theCommercial Code of Japan with various revisions that would, for the most part, be applicable to events or transactions
which occur on or after May 1, 2006 and for the fiscal years ending on or after May 1, 2006. Under the Corporation Law
the entire amount of the issue price of shares is required to be designated as stated common stock account although a
company in Japan may, by resolution of its Board of Directors, account for an amount not exceeding 50% of the issue priceof new shares as additional paid-in capital.

(11) RETAINED EARNINGS AND DIVIDENDS
The Corporation Law provides that an amount equal to 10% of distributions from retained earnings paid by theCompany and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when
the total amount of the additional paid-in capital and the legal reserve equals 25% of their respective stated capital.
The Corporation Law also provides that additional paid-in capital and legal reserve are available for appropriations by
the resolution of the stockholders. Balances of the legal reserve are included in retained earnings in the accompanying
consolidated balance sheets.
Cash dividends charged to retained earnings for the years ended March 31, 2007 and 2006 represent dividends
paid out during those years. The amount available for dividends is based on the amount recorded in the Company’s
non-consolidated books of account in accordance with the Corporation Law.
Dividends paid during the year ended March 31, 2006 which was approved by the general meeting of stockholders held on
June 28, 2006 are as follows:(a) Total dividends(b)Cash dividends per common share(c) Record date(d)Effective date

￥1,391 million ($11,783 thousand)￥14 ($0.12)
March 31, 2006
June 28, 2006

Dividends paid during the year ended March 31, 2007 which was approved by the Board of Directors held on November
13, 2006 are as follows:(a) Total dividends(b)Cash dividends per common share(c) Record date(d)Effective date

￥1,192 million ($10,097 thousand)￥12 ($0.10)
September 30, 2006
December 8, 2006

Dividends to be paid after the balance sheet date but the record date for the payment belongs to the year ended March 31,
2007 which was approved by the general meeting of stockholders held on June 27, 2007 are as follows:(a) Total dividends(b)Dividend source(c) Cash dividends per common share(d)Record date(e) Effective date

￥1,391 million ($11,783 thousand)
Retained earnings￥14 ($0.12)
March 31, 2007
June 28, 200735

(12) GENERAL AND ADMINISTRATIVE EXPENSES
Significant components of general and administrative expenses are as follows:
Thousands of
U.S. dollars
2007

Millions of yen
2007

Salaries
Pension cost
Provision for retirement and severance benefits (directors and corporate auditors)
Administrative and computer expenses
Depreciation

￥

2006

3,087
307
86
1,131
1,618

￥

3,148
424
197
1,197
1,490

$

26,150
2,601
729
9,581
13,706(13) NET INCOME PER SHARE INFORMATION(a) Net Income per Share
Basic net income per share, and reconciliation of the numbers and the amounts used in the basic net income per sharecomputations for the years ended March 31, 2007 and 2006 are as follows:
Yen
2007

Basic net income per share￥

Us dollars
2007

2006

42.09

￥

48.93

$

Thousands of
U.S. dollars
2007

Millions of yen
2007

Net income
Net income not applicable to common stockholders:
Directors’ and corporate auditors’ bonuses
Net income applicable to common stockholders

0.36

2006

￥

4,156

￥

4,953

$

35,205

￥

−
4,156

￥

(123)
4,830

$

−
35,205

Number of shares(Thousands)
2007
2006

Weighted average number of shares outstanding on which basic net income per share is calculated

98,73098,707(b) Net Assets per Share
Net assets per share, and reconciliation of the numbers and the amounts used in the net assets per share computations at
March 31, 2007 are as follows:Yen

Net assets per share￥

Us dollars

1,244.61$

Thousands of
U.S. dollars

Millions of yen

Total net assets
Amount deducted from total net assets
Net assets applicable to common stockholders￥￥

122,876−
122,876

10.54$ 1,040,881−$ 1,040,881

Number of shares(Thousands)

Number of shares outstanding at the end of year on which net assets per share is calculated

98,726(14) LEASES
Finance leases, except for those where the legal title of the underlying property is transferred from the lessor to the lessee atthe end of the lease term, are accounted for similarly to operating leases under accounting principles generally accepted inJapan.
Certain key information about such lease contracts of the Company and its consolidated subsidiaries for the years ended
March 31, 2007 and 2006 are as follows:36

FINANCIAL SECTION(a) Lessee(i) Acquisition cost, accumulated depreciation and net book value of leased assets, if they had been capitalized:
Thousands of
U.S. dollars
2007

Millions of yen
2007

Furniture and fixtures:
Acquisition cost
Accumulated depreciation
Net book value

￥
￥

2006

46
(19)
27

￥
￥

348
(281)
67

$
$

390
(161)
229

(ii) Lease expense and future minimum lease payments including interest expense:
Thousands of
U.S. dollars
2007

Millions of yen
2007

Lease expense
Future minimum lease payments:
Within one year
Over one year

2006

￥

46

￥

84

$

390

￥

9
18
27

￥

46
21
67

$

76
153
229

￥

￥

$

(b) Lessor(i) Acquisition cost, accumulated depreciation and net book value of leasing assets as of March 31, 2006 are as follows:

Furniture and fixtures

Acquisition cost
Accumulated depreciation
Net book value￥￥

Millions of yen
Others

119
(88)
31

69
(46)
23

Total

￥
￥

188
(134)
54

(ii) Lease income, depreciation and future minimum lease payments including interest income for the year ended March 31,
2006 are as follows:
Millions of yen

Lease income
Depreciation
Future minimum lease payments:
Within one year
Over one year

￥

63
30

￥

38
24
62

￥

(15) PLEDGED ASSETS
The carrying value and classification of assets owned by the Company that have been pledged to counterparties as of March
31, 2007 and 2006 are as follows:

2007

2006

Thousands of
U.S. dollars
2007￥ 680,176
78,398940,091
181,221
132,991
850,698￥ 1,324,872
503,441
1,325,494
98,477595,341−$ 5,761,762
664,108
7,963,499
1,535,121
1,126,565
7,206,252−

29,000−Millions of yen

Short-term investments
Short-term loans receivable
Securities in deposit
Collateral money for securities borrowed
Investments in securities
Securities received as collateral for securities
loans for margin transactions , etc.
Securities in custody37

Assets in the above table were pledged for the followings:
2007

2006

Thousands of
U.S. dollars
2007￥ 1,667,000
436,700
96,739181,221494−−￥ 1,395,100−
114,420
98,477−
672,400
169,749$ 14,121,135
3,699,280
819,475
1,535,121
4,185
−
−

Millions of yen

Call money
Short-term borrowings
Payables under repurchase agreements
Securities borrowed
Other current liabilities
Bills sold
Collateral money received for securities lent

In addition to the above, short-term investments of ¥170,084 million ($1,440,779 thousand), securities in custody of¥30,300 million ($256,671 thousand), other current assets of ¥500 million ($4,235 thousand), investments in securities of¥208,743 million ($1,768,259 thousand), and securities received as collateral for securities loans for margin transactions, etc. of ¥70,610 million ($598,136 thousand) are deposited for the real time settlement system of Bank of Japan, theClearing Fund of Japan Securities Clearing Corporation and Japan Government Bond Clearing Corporation and the foreignexchange settlement, etc. at March 31, 2007.
In addition to the above, securities received as collateral for securities loans for margin transactions and securities
received as collateral for bond borrowing and lending transaction with cash collateral amounting to ¥2,693,541 million
were deposited as guarantee for liabilities at March 31, 2006. And short-term investments of ¥15,998 million, othercurrent assets of ¥500 million, and investments in securities of ¥5,548 million are deposited to the Clearing Fund of Japan
Securities Clearing Corporation and Japan Government Bond Clearing Corporation at March 31, 2006.
The fair value of the securities received as collateral for bond borrowing and lending transaction with cash collateral andsecurities borrowed under loan for consumption agreement as of March 31, 2007 and 2006 was as follows:
Millions of yen
2007

Securities loaned
Securities pledged as collateral
Securities on hand2006

￥ 1,407,181
560,858
116,017￥

108,701
1,584,601
177,519

Thousands of
U.S. dollars
2007$ 11,920,212
4,751,021
982,778(16) DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not hold or issue derivative financial instruments for the purpose of trading. One subsidiary hasentered into interest rate swap agreements to manage interest rate exposures borrowings.
If interest rate swap agreements are used as hedges and meet certain hedging criteria, the difference in amounts to be paidor received on the interest rate swap agreements is recognized over the life of the agreements as an adjustment to interest
expense.
The counterparties to the derivative transactions are financial institutions with high credit ratings and consequently,
the Company does not anticipate credit-related losses from non-performance by the counterparties to transactions
involving derivative financial instruments.
Derivative transactions have been executed and controlled in accordance with the Company’s derivative regulations.
The information relating to fair value of derivative transactions to which hedge accounting is applied is not subject todisclosure.

(17) COMMITMENTS AND CONTINGENCIESAs of March 31, 2007 and 2006, undrawn amount of general loan for securities companies and customers and overdraft
loan are as follows:
Thousands ofMillions of yen

Total credit line
Drawn amount
Undrawn amount

38

2007

2006

U.S. dollars
2007￥ 592,492(35,084)￥ 557,408￥ 591,644(54,879)￥ 536,765$ 5,018,992(297,196)$ 4,721,796

FINANCIAL SECTION(18) SEGMENT INFORMATION(a) Industry segments
The Company had categorized its business into the two segments of “securities finance business” and “data processing
service business.” JSF Information Technology Co., Ltd. which has engaged in the data processing service business has been
excluded from consolidation during the year ended March 31, 2007. As a result, the segments have been reclassified into asingle industry segment, securities finance business.
Operations by business group for the year ended March 31, 2006 were summarized as follows:

Securities finance

Revenues from outside customers
Inter-segment revenues
Operating expenses
Operating income(loss)
AssetsDepreciation and amortization
Capital expenditures￥

34,23417
34,251
25,352￥
8,899￥9,720,253
1,541
1,663

Millions of yen
2006
Data processing service
Total

￥

￥
￥

2,992
58
3,050
3,008
42
2,174
95
41

￥

37,22675
37,301
28,360￥8,941￥9,722,427
1,636
1,704

Elimination / corporate￥￥￥

Consolidated

̶ ￥37,226(75)
̶(75)
37,226(61)
28,299(14) ￥
8,927(44) ￥ 9,722,383
(9)
1,627
(14)
1,690

Notes: 1.Business segments reflect the actual business contents.
2.Major revenues of each business segment
Securities finance segment: interest income on loans, securities lending fees, etc.
Data processing service segment: service fees for computer processing, etc.
3.All of the assets are allocated to appropriate segment.

(b) Geographic segments
The Company does not have any overseas subsidiaries for the years ended March 31, 2007 and 2006.
(c) Overseas sales
Not applicable.

(19) Business Combinations
JSF Information Technology Co., Ltd. (JSFIT) is engaged in the information processing services, software development,
sales and leasing, and real estate leasing and Nihon Building Co., Ltd. (Nihon Bldg) is engaged in real estate ownershipand leasing, real estate trading and brokerage and insurance agency services, both are wholly-owned subsidiaries of theCompany.
JSFIT separated its real estate business on July 1, 2006 and transferred the business to Nihon Bldg, Nihon Bldg issued
600 new shares of its common stock to JSFIT shareholders at the day before the separation at an exchange ratio of 3 sharesfor each outstanding share of JSFIT’s common stock.
These corporate restructurings are to increase business efficiency by proper concentration of group resources and toutilize the capital in group effectively.
The separation constitutes a transaction under common control under the “Accounting for Business Combinations”(Statement of Opinion issued by the Business Accounting Council on October 31, 2003), the transaction has been
eliminated in consolidation. The difference between the cost and the transferred assets of ¥394 million ($3,338 thousand)is recorded as an increase of retained earnings.

39

FINANCIAL SECTION(20) Subsequent Event
Business integration of affiliates
Net Wing Securities Co., Ltd. (“Net Wing”), formerly named Nihon Kyoei Securities Co., Ltd. which is an affiliate of theCompany accounted for by the equity method, have decided to establish a joint holding company named M&N Holdings
Inc. (“M&N”), with Maruwa Securities Co., Ltd. (“Maruwa”) by transfer their shares on October 1, 2007.
1.1 share of M&N common stock will be allotted to 1 share of Net Wing common stock. 1 share of M&N common
stock will be allotted to 1 share of Maruwa common stock.

(21) Supplemental Cash Flow Information
Assets and liabilities of the subsidiary, JSF Information Technology Co., Ltd. (JSFIT) excluded from consolidation in 2007
by sales, and net proceeds from sales were as follows:
Assets and liabilities:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Sales priceCash and cash equivalents held by the subsidiary
Net proceeds from sales

Millions of yen

Thousands of U.S. dollars￥ 1,525
1,346
(642)
(869)

$ 12,918
11,402(5,438)(7,361)

￥

$

￥

40

587
345
242

$

4,972
2,922
2,050

INDEPENDENT AUDITORS’ REPORTTo the Board of Directors of Japan Securities Finance Co., Ltd.
We have audited the accompanying consolidated balance sheets of Japan Securities Finance Co., Ltd. and consolidated
subsidiaries as of March 31, 2007 and 2006, and related consolidated statements of income, changes in net assets andcash flows for the years then ended, all expressed in Japanese yen. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates madeby management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Japan Securities Finance Co., Ltd. and consolidated subsidiaries as of March 31, 2007 and 2006, and theresults of their operations and their cash flows for the years then ended in conformity with accounting principles generally
accepted in Japan.
The accompanying consolidated financial statements as of and for the year ended March 31, 2007 have been translated into
United States dollars solely for the convenience of the reader. We have recomputed the translation and, in our opinion, theconsolidated financial statements expressed in yen have been translated into United States dollars on the basis described in
Note 2 to the consolidated financial statements.

Toyo Horwath
Tokyo, Japan
June 27, 2007

41

OUTLINE OF THE CORPORATE GROUP(As of the end of March 31, 2007)

Securities Finance Business

JSF Group

Information Processing Business
Other BusinessSubsidiary

Subsidiary

Nihon Building Co., Ltd.

JSF Trust andBanking Co., Ltd.

•Real estate ownership and leasing•Real estate trading and brokerage•Insurance agency services•Trust services•Banking services for deposits and loans

Affiliate

Japan
Securities
Finance Co., Ltd.

Affiliate
Netwing
Securities Co., Ltd.
•Securities business

JSF Information
Technohgy Co., Ltd.
•Information processing services•Software development and sales•Real estate ownership and leasing

Affiliate
JBIS Holding, inc.
•Management of Subsidiaries

Atfiliate

Affiliate

Japan Securities Agents, Ltd.

Japan Information
Processing Service Co., Ltd.

•Securities clearing agent•Transfer agent•Securities custody•PTS services•Information processing services•Software development and sales•Information equipment sales

42

CORPORATE DATAJAPAN SECURITIES FINANCE CO., LTD.

Board of Directors and Corporate Auditors(As of June 27, 2007)

Address
1-2-10 Nihonbashi-Kayabacho, Chuo-ku, Tokyo 103-0025
Tel:+81-3-3666-3184
Fax:+81-3-3666-1403
Established
July 1927

Directors
President
Executive Vice President
Senior Managing Director
Managing Directors

Capital￥10 billion

Executive Adviser
Directors

Branch offices
Sapporo Branch
4-5 Minami Ichijo Nishi, Chuo-ku, Sapporo 060-0061
Tel: +81-11-241-1291
Fukuoka Branch
2-14-2 Tenjin, Chuo-ku, Fukuoka 810-0001
Tel: +81-92-741-1861

Minoru Masubuchi*
Hiroshi Saito*
Sadamu Shimomura *Yasuhisa Hashimoto
Hiroshi Nasuno
Kunio Kojima
Takashi Imai **Akira Kanno **Eiichiro Okumoto **(* Representative Directors)(** Outside Directors)

Corporate Auditors
Yoshiyasu Arai *Shigeru Awashima
Yasukuni Watanabe *Toshio Kamiyama *Web site
http://www.jsf.co.jp(* Outside Corporate Auditors)

Exective Officers
President
Executive Vice President
Senior Managing Director
Managing Directors

Stock exchange listing
Tokyo Stock Exchange, 1st Section
Shares outstanding
99,704,000 shares (as of March 31, 2007)

Executive Officer

Number of shareholders
6,227 shareholders (as of March 31, 2007)

Minoru Masubuchi
Hiroshi Saito
Sadamu Shimomura
Yasuhisa Hashimoto
Hiroshi Nasuno
Hiroshi Asakura
Mochiyoshi Katou
Teiichi Takatori

Transfer agent
Japan Securities Agents, Ltd.
1-2-4 Nihonbashi-Kayabacho, Chuo-ku, Tokyo 103-8202
Tel: +81-3-3668-9211
Rating Information
Long-term Rating(As of the end of July, 2007)
Short-term Rating

A
AAAA-

A-1
a-1+
J-1+

Standard and Poor’s (S&P)
Rating and Investment Information, Inc. (R&I)
Japan Credit Rating Agency (JCR)43

ORGANIZATION
General Meetingof Shareholders
Board of Auditors
Board of Directors(Chairman)
President

Managment Committee
Exective Officers Meeting

Exective Officers in Charge

Audit Depertment

Risk Management Depertment
General Affaires Department

Compliance Committee
ALM Committee

Treasury Department

Risk Capital Meeting

Planning Department

System Committee

Margin Loan Department
Loan Department
Bond Trading Department
Settlement & Custody Department
Information Systems Planning Department

Sapporo Branch

Fukuoka Branch

44

JAPAN SECURITIES FINANCE CO., LTD.
1-2-10 Nihonbashi-Kayabacho, Chuo-ku, Tokyo, 103-0025
Printed in Japan