JAPAN SECURITIES FINANCE CO., LTD

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ANNUAL REPORT 06.9.1 10:37 AM ページ 1

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

5

Our Business Field

6

Corporate Governance13

Risk Management

15

Business Results

19

Financial Section

22

Independent Auditors’ Report

37

Outline of the Corporate Group38

Corporate Data

39

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ANNUAL REPORT 06.9.1 10:37 AM ページ 1

FINANCIAL HIGHLIGHTS

Japan Securities Finance Co.,Ltd. and Consolidated Subsidiaries

2006(April 1, 2005 March 31, 2006)

2005(April 1, 2004 March 31, 2005)

Thousands of
U.S. dollars
2006(April 1, 2005 March 31, 2006)

￥

￥

＄

Millions of yen

Consolidated financial results

Oparating revenues

37,226
4,953
118,962

Net income
Shareholders' equity (period end)

36,145
5,519
126,337

Yen
2006

316,898
42,164
1,012,701
U.S. dollars
2006

2005

Amounts per share

Net income

￥

48.93
1,205.27

Shareholders' equity

￥

54.08
1,276.04

＄

0.42
10.26

Note:U.S. doller amounts in this annual report are translated from Japanese Yen, for convenience only, at the rate of ￥117.47=US$1, the approximate
exchange rate at March 31,2006.

Operating revenues

Net income（Millions of yen）

（Millions of yen）

40,00035,00036,14531,68630,00028,661

6,000

37,226

5,519
4,953

5,000

30,897

4,002

4,000

25,0003,000

20,00015,000

2,989
1,746

2,000

10,000
1,000

5,000
0

02

03

04

05

0

06

02

Net income per share

03

30.00

06

（Yen）
1,400

54.08
48.93

50.00

1,200

1,169

1,151

03

04

1,276

1,205

1,089

1,000

38.76

40.00

05

Shareholders' equity per share

（Yen）
60.00

04

800

26.75

600
20.00

15.86

400

10.00
0

200
02

03

04

05

0

06

1

02

05

06

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ANNUAL REPORT 06.9.1 10:37 AM ページ 2

MESSAGE FROM THE PRESIDENT

Minoru Masubuchi
President

It is my sincere hope that the Annual Report 2006 for the fiscal year ended March 31, 2006 will be of use toshareholders, investors and other supporters of Japan Securities Finance Company.
BUSINESS REVIEW

yen over the previous fiscal year to reach 2,252.1 billion
yen.

Business Environment
Looking back on the Japanese economy during the fiscal
year, the basic tone of economic recovery was sustainedin the environment that capital investment showed atendency to increase against a background of strong
corporate earnings and improved personal income ofworkers shored up steady consumer spending.

Meanwhile, the outstanding balance of standardized
margin buying transactions in the Tokyo market
declined from 2,600 billion yen at the beginning of the
fiscal year to less than 2,300 billion yen in August
temporarily, but then turned back upwards, driven bystrong gains for the market as a whole. In February, itcrossed the 5,000 billion yen for the first time in almost
15 years (the last time was May 1991) and closed thefiscal year at the level of 4,500 billion yen. On theother hand, the outstanding balance of standardized
margin selling transactions moved within the range of
600 billion yen to 1,000 billion yen, ending the fiscal
year at the level of 900 billion yen.

In the stock market, the Tokyo Stock Price Index(TOPIX), which started the fiscal year at 1,186 points,
dropped to 1,109 points in May due to expectations ofan economic slowdown in the United States and otherfactors, but it began to rebound thereafter onheightened expectations of economic recovery andstrong corporate performance. After the turn of the
New Year, news reports about some emerging
corporations resulted in conflicting views of the market
that amplified volatility, but by the end of January the
TOPIX had retaken the 1,700 point level for the firsttime in 5 years and 9 months and closed the fiscal year
at 1,728.

Turning to the bond market, the yield of newly
issued 10-year Japanese government bonds (JGBs),
which started the fiscal year at 1.328%, declined to1.165% at one point in June due to the general global
decline in long-term interest rates. The yields
continued to be volatile thereafter, driven by stockmarket trends and expectations that the Bank of Japan
would finally abandon its quantitative easing policy.
After the quantitative easing policy was believed tocome to an end, the yields began to rise and reached1.764% at the end of March.

The average daily trading volume on the firstsection of the Tokyo Stock Exchange during the fiscal
year stood at 2,180 million shares, an increase of 655
million over the previous fiscal year; likewise, theaverage daily trading value increased by 921.9 billion

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ANNUAL REPORT 06.9.1 10:37 AM ページ 3

MESSAGE FROM THE PRESIDENT

themselves to be understaffed indicates that Japanese
economic activities are on the increase. In addition,
expanding overseas economies are boosting exports andstrong corporate earnings, together with modest
increase in personal income of workers, are likely toincrease domestic private-sector demand.

Business Results of the JSF GroupThe amount of total outstanding loans extended by
JSF group companies during the period averaged
2,760 billion yen, a substantial increase of 445.6
billion yen over the previous period. This was due tothe increase in the amount of loans for margintransactions caused by high level in the outstandingbalance of standardized margin buying transactions.

Against this background, while there will be
substantial declines in dividends from JSF Trust andBanking Co., Ltd., the outstanding balance ofstandardized margin buying transactions in the Tokyo
market has remained solid since April, which indicatesa high likelihood of increases in loans for margintransactions for the full year, and the company, as nonconsolidated basis, anticipates gains in both revenues
and profits during the coming year.

As to the performance during the fiscal year, whileinterests on loans for margin transactions increased,
declines in JGB positions resulted in less interest
income and trading profits, and the JSF groupcompanies recorded consolidated operating revenues of37,226 million yen (up 3.0% year-on-year), recurringincome of 8,293 million yen (down 13.4% year-onyear) and net income for the term of 4,952 million yen(down 10.3% year-on-year).

With respect to its subsidiaries, both of thecompanies forecast income roughly on par with theprevious fiscal year. Among equity-method affiliates,
Japan Information Processing Service Co., Ltd. forecasts
income on par with the previous fiscal year and Japan
Securities Agents, Ltd. forecasts significant
contractions in its deficits, while NetWing Securities
Co., Ltd. (formerly, Nihon Kyoei Securities Co., Ltd.)
foresees a reduction in income.

Nonetheless, the company pays a year-end
dividend of 14 yen per share, which combined with
the interim dividend results in a total annual dividendof 24 yen per share (up 10 yen per share from theprevious fiscal year). This dividend was set inaccordance with the company’s dividend policy ofreturning profits to shareholders at Dividend Payout
Ratio of approximately 40% on non-consolidated
financial results.

Mid-Term Management Plan
The company formulated a Medium-Term
Management Plan (FY 2006 – FY 2008) that seeks to
improve corporate value over the medium and longterms, and announced it on March 13, 2006.

In July, the company spun off its subsidiary, JSF
Information Technology Co., Ltd., and subsequently
sold the majority of its shares to its affiliate, Japan
Information Processing Service Co., Ltd. This wasdone as part of a strategy to achieve efficiency gains
within group companies by consolidating the businessportfolio and to facilitate operations by bringing
capital relationships in line with actual business
operations.

The company’s management target is to achieve
recurring income of 12,000 million yen on nonconsolidated basis by the final year of the MediumTerm Management Plan, i.e. FY 2008 (this assumes anaverage margin loan balance of 1,600 billion yen andan increase of approximately 0.50 percentage points inshort-term interest rates from the time at which theplan was announced).

OUTLOOK FOR NEXT FISCAL YEAR
Earnings Outlook
Turning to the future, the economy as a whole isexpected to continue to enjoy steady recovery. Excess
corporate debt and other structural adjustmentpressures have been alleviated to a large extent, and thefact that an increasing number of companies consider

Japan Securities Finance has a mission tocontribute to the development of securities industry asa specialist institution of securities finance business andwill continue to meet the demands that society has
placed on it.

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MESSAGE FROM THE PRESIDENT

Current Challenges (Strategy)

respectively and their areas of responsibility updated so
as to strengthen monitoring functions and enhance andreinforce risk management.

Thanks to the growing number of individual investors
using the Internet trade, the ratio of stock trading by
individual investors to whole trading values has
doubled over the last five years, and household stock
holding crossed the 100 trillion yen line for the firsttime in almost 16 years at the end of December 2005.
This represents a clear trend of “from savings toinvestment.” Preparations for the dematerialization ofstock certificates, which are scheduled for completionin January 2009, are now moving forward as the final
step of the reform of securities clearing and settlement
system.

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.
Japan Information Processing Service Co., Ltd. andJapan Securities Agents, Ltd., both of which are ourequity-method affiliates, decided to establish a joint
holding company called “JBIS Holdings, Inc.,” towhich the two companies will assign shares, and thisoperation is scheduled to take place by October 1st,
2006 (tentative). With the upcoming dematerializationof stock certificates, there will be greater synergy
between the accumulated expertise of the twocompanies, which will enable them to offer betterquality services to their clients. This, we believe, is inline with our business philosophy and orientation ofcontributing to the development of the securities
industry.

Under these circumstances, we believe that Japan
Securities Finance has a mission to respond flexibly tothe 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 for our
primary service of providing loans for margintransactions under the Medium-Term Management
Plan announced in March of this year. Strengthening
our ability to procure stock certificates will also
continue to be an emphasis with a view to expanding
the number of loanable issues, and we hope tostrengthen our competitiveness. We are alsoendeavoring to increase the outstanding balance ofloans from areas other than standardized margintransactions, for example, by expanding the number of
securities companies to which we extend “loans fornegotiable margin transactions,” a new type of loan for
securities companies that has been introduced in last
October and covers negotiable margin transactions. In
April of this year, we overhauled our organizations inorder to strengthen our internal governance and risk
control management. The Inspections Department andResearch Department were reorganized into the Audit
Department and Risk Management Department

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

Minoru Masubuchi
President

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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

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ANNUAL REPORT 06.9.1 10:37 AM ページ 6

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 tocases in which a securities company can procure funds andstock certificates to be lent to customers by internal
matching (Note) or external procurement withoutborrowing from a securities finance company, thecondition of margin transactions may be decided freely innegotiations 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 (6months), the investor sells the stock, repays the funds
borrowed (reversing transaction) and receives themargin. 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 acompany or, conversely, of appropriating sell side's proceeds of sale tobuy side's funds for purchasing stocks.

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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, in placeof the securities company, delivers funds or stock
certificates to clearing facilities of stock exchanges(6). The
stock certificates purchased (collateral stock certificates forloans) 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

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

7

Japan Securities Finance

Submit application(5)Place trade order

Customer

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ANNUAL REPORT 06.9.1 10:37 AM ページ 8

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 isnecessary to procure the stock certificates needed forsettlement 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

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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 Billsor 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 of loan
agreement. This type of arrangement has several
advantages, including helping to form a transaction thatmatches 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.

9

ANNUAL REPORT 06.9.1 10:37 AM ページ 10

Types of bond transactions

Cash collateral

Cash collateralInterest

BorrowerLending rateLenderBorrowing rate



Bonds

Bonds

REPO transactions

Ordinary transaction

Lender

Bonds

Bonds
Securities collateral

Borrowing rate

Lending rate

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

Bonds

Bonds
Trading value

Trading value

Buyer

Gensaki 

Borrower

JSF(securities-collateral transaction)

Seller

0806

GENERAL 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.
In February 2002, we implemented offer-bid

borrowing and lending transactions (e Stock Lending) byexpanding 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.

Mechanism of lending stock business

Stocks(deposit)

Stocklenders
Institutional
investors

Stocks(lend)

JSF
Borrowing fee

Collateral deposit

Lending fee

10

Securities
companies

ANNUAL REPORT 06.9.1 10:37 AM ページ 11

OUR BUSINESS FIELDLOANS FOR NEGOTIABLE MARGIN TRANSACTIONSWhat 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.

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.

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

Loans for negotiable margin transactions

Place an order for negotiablemargin buying

JSF

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

Stock exchange
clearing facilities

11

Japan Securities Finance

Loan funds forpurchasing stocks

Securities company

Application

Deposit margin requirement

Customer

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ANNUAL REPORT 06.9.1 10:37 AM ページ 12

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  

12

JSF
Safe keeping deposit loans

ANNUAL REPORT 06.9.1 10:37 AM ページ 13

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

ReportCorporate
Auditors

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

13

Consultation and Report for Compliance

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All Depertment
and branches ,etc.

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ANNUAL REPORT 06.9.1 10:37 AM ページ 14

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 orreporting 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     14

  

Consult&
report

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ANNUAL REPORT 06.9.1 10:37 AM ページ 15

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 andsystem 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.

15

ANNUAL REPORT 06.9.1 10:37 AM ページ 16

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

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

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

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

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

・

・ 

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

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

16

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

Audit Department

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

Integrated Risk
Management Sector

Meetlng

Management 

Risk Operation Sector

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ANNUAL REPORT 06.9.1 10:37 AM ページ 17

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 andmanages 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 andloan transactions by the Risk Management Department, each risk operation department sets and manages amounts fortransaction 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

17

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ANNUAL REPORT 06.9.1 10:37 AM ページ 18

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
protection of our own information assets (information and information systems), necessary regulations are consolidated andall officers and employees are familiarized with handling of the information assets. Furthermore, to minimize the effects ofsystem 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.

18

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ANNUAL REPORT 06.9.1 10:37 AM ページ 19

BUSINESS RESULTS

recurring income was 8,293 million yen (down 13.4%
year-on-year) due to the posting of 815 million yen loss inequity-method because of poor performance at equitymethod affiliates. In addition, the company posted 33
million yen in extraordinary profits due to the reversal of
the allowance of doubtful receivables and other factors, aswell as 140 million yen in extraordinary losses due
primarily to losses on the sale of fixed assets inconjunction with a rebuilding of properties owned by
Nihon Building Co., Ltd. As a result, consolidated net
income for the period was 4,953 million yen (down
10.3% year-on-year).

Consolidated operating revenues rose 3.0% year-on-year
to 37,226 million yen thanks to increased interests onloans for margin transactions, which helped to offset
declines in interest revenues from JGBs caused by
reducing JGB positions. On the other hand, consolidated
operating expenses rose 16.5% year-on-year to 19,142
million yen due to the increased fees on borrowing
securities in concert with the fees on lending securities
reported in the operating revenues as well as the increased
losses on the sale of JGBs at JSF Trust and Banking Co.,Ltd.
As a result, consolidated operating income was 8,927
million yen (down 12.0% year-on-year), and consolidated

Breakdown of JSF group operating revenues
2006(April 1, 2005 March 31, 2006)
Amount(¥ million)

2005(April 1, 2004 March 31, 2005)
Amount(¥ million)

34,23433,17822,993

17,30910,158

6,794

893

889

11,226

9,040

865

887

Interest on bond financing

714Interest on general loans

858

873

2,700

1,926

Stocks

1,465

1,016

Bonds

1,235

910

Fees on lending

929

693

Interest on collateral money for securities borrowed

306

217

4,287

8,206

Interest on loans

1,382

1,067

Trust charges

161

227

Real estate leasing

871

939

2,518

3,911

2,992

2,967

Fees on information services

2,726

2,755

Fees on machinery leasing

78

107

Others188

105

37,22636,145

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

Securities lending

Trust banking

Other businessInformation processing businessTotal operating revenues

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ANNUAL REPORT 06.9.1 10:37 AM ページ 20

SECURITIES FINANCE BUSINESSOperating revenues from securities finance business increased to 37,226 million yen (up 3.2% year-on-year).
Loans for Margin Transactions
In the loans for margin transactions business, due to the increased outstanding balance of standardized margin buying
transactions, the amount of loans for margin transactions during the fiscal year averaged 1,637.6 billion yen, a dramaticincrease of 539 billion yen over the previous period, resulting in increased interests on loans. On the other hand, the feeson securities lending increased, as the stock loans for margin transactions during the fiscal year increased by 112.8 billion
yen from the previous year to 651 billion yen. As a result, the operating revenues from loans for margin transactions
business were 22,993 million yen, (up 32.8% year-on-year).
Average balance of loans

Average balance of stock loans（Billions of yen）

（Billions of yen）

1,800

800

1,638

1,600

700

1,400

504

538

400

800

651
449

400

300

409

200
100

200
0

540

500

1,000

600

651

600

1,099

1,200

711

02

03

04

05

0

06

02

03

04

05

01

Bond Financing and General Loans BusinessIn bond financing and general loans business, the company experienced higher demand for funds as brokerages sought tostrengthen their liquidity on hand in the face of market volatility and the loans for negotiable margin transactions thatbegan in October of last year helped to further increase outstanding balances, but the growth in loan to individual investors
and corporations was sluggish. As a result, average outstanding bond financing was 1,800 million yen and average
outstanding general loans 44,600 million yen (of which, outstanding loans for negotiable margin transactions was 2,500
million yen) during the fiscal year, resulting in operating revenues of 865 million yen for this business (down 2.6% yearon-year).
Average balance of bond financing

Average balance of general loans（Billions of yen）

（Billions of yen）

10
8

60

7.9

55.8

50

45.7

7.1

42.5

41.8

04

05

44.6

40
6

3.7

4

30

3.5

20

1.8

2
0

10

02

03

04

05

0

06

20

02

03

06

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 21

BUSINESS RESULTS

Securities Lending Business
As for the business of securities lending, in addition to brisk demands in the general stock lending department for expand
issuing of convertible-bond type corporate bonds with new share reservation rights as well as hedge sales for public capitalincrease and failure-avoidance transactions, we concentrated on SC transactions (transactions in specified issues) as well as
on expanding clientele in the bonds department. As a result, the operating revenues for this business registered 2,700
million yen (up 40.1% year-on-year).
Trading volume of general stock lending

Trading volume of bond lending（Billions of yen）

（Billions of yen）
200,000

1,200

995

1,000
800

175,075

180,000
160,000

822

140,000

616

600

680

120,000

664

100,000
80,000400

60,00082,577
63,94840,000200

41,05335,50903

04

20,000
0

02

03

04

05

0

06

02

05

06

Trust Banking BusinessIn the trust banking business, the average outstanding loan balance for the fiscal year was 1,016.4 billion yen, a decline of
141.5 billion yen from the previous fiscal year due primarily to the declining loans to government sector. Nonetheless,interests on loans rose thanks to a renewed emphasis on syndicated loan. On the other hand, because a temporarycompression in securities investment position during the fiscal year resulted in substantial declines in interest income andtrading profits, operating profits of trust bank business was 4,287 million yen (down 47.8% year-on-year).

Other BusinessIn other revenues, the company recorded 2,518 million yen (down 35.6% year-on-year) due to declining coupon revenues
resulting from reduced position of JGBs.

INFORMATION PROCESSING BUSINESSIn the information processing business, in spite of decreased orders for data entry services and leasing business, the systems
development side performed well thanks to strong sales of catalog sales management software, and the operating revenues
amounted to 2,992 million yen (up 0.9% year-on-year).

21

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 22

FINANCIAL SECTIONCONSOLIDATED BALANCE SHEETSJapan Securities Finance Co., Ltd. and Consolidated Subsidiaries as of March 31, 2006 and 2005

2005

Thousands of
U.S. dollars(note 2)
2006

95,956$

Millions of yen

Assets2006

Current assets:￥

Cash (note 3)

3,824

￥

32,553

118,000

136,000

1,004,512

Short-term investments (notes 4 and 15)

1,365,935

1,085,895

11,627,947

Short-term loans receivable (note 15)

3,194,928

2,528,076

27,197,821

Securities lent

705,151

604,540

6,002,818

Securities in custody (note 15)

193,722

255,467

1,649,119

Securities in deposit (note 15)

1,740,415

955,999

14,815,825

856

1,014

7,287

1,662,232

2,031,907

14,150,268

Other current assets

42,625

117,092

362,859

Allowance for doubtful receivables(1,307)(1,319)(11,126)

9,026,381

7,810,627

76,839,883

7,696

7,695

65,5152

2

17

Tools, furniture and fixtures

2,132

2,302

18,149

Land

3,324

3,063

28,297

397

105

3,379

13,551

13,167

115,357(6,020)(6,193)(51,247)

7,531

6,974

64,110

3,838

4,455

32,672

669,067

1,397,824

5,695,642

Deferred tax assets (note 9)

7,465

450

63,548Other investments and other assets

8,142

9,695

69,311

Allowance for doubtful receivables

(41)

(51)

(349)

684,633

1,407,918

5,828,152￥ 9,722,383￥9,229,974$ 82,764,817

Call loans

Deferred tax assets (note 9)
Collateral money for securities borrowed (note 15)

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.

22

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 23

FINANCIAL SECTION

Thousands of
U.S. dollars(note 2)
2006

Millions of yen

Liabilities and Stockholders’ Equity

2006

2005

Current liabilities:

Call money (notes 7 and 15)
Bills sold (notes 7 and 15)
Short-term borrowings (note 7)
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￥

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￥ 1,410,200
2,135,100
959,820
172,000
26,6982,962
2,328,595
1,386,620
423,565
5,821
235,652
9,087,033

4,500
–
99
3,924
8,040
16,563

2,500
225
103
4,153
9,623
16,60438,308–843
33,40468,443140,998

9,603,421

9,103,637

81,752,116

10,00010,00085,1285,182
109,872
143(5,751)(484)
118,962

5,182
107,473
151
3,784
(253)
126,337

44,113935,320
1,217(48,957)(4,120)1,012,701

16,722,567
5,724,015
13,431,685–
974,036
15,706
20,965,838
19,818,532
2,574,104
75,126
1,309,509
81,611,118

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
Stockholders’ equity:

Common stock (note 10):
Authorized 200,000,000 shares in 2006 and152,195,000 shares in 2005;
issued and outstanding 99,704,000 sharesin 2006 and 2005
Additional paid-in capital (note 10)
Retained earnings (note 11)
Gain on revaluation of land (note 6)
Net unrealized gain (loss) on other securities (note 4)
Treasury stock
Total stockholders’ equity
Commitments and contingencies (note 16)

Total liabilities and stockholders’ equity￥

23

9,722,383￥

9,229,974$

82,764,817

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 24

CONSOLIDATED STATEMENTS OF INCOME
Japan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2006 and 2005
Millions of yen
2006

Operating revenues
Operating expenses

2005

￥

￥ 37,226

Operating profit

General and administrative expenses (note 12)
Operating income

Thousands of
U.S. dollars(note 2)
2006$

19,142
18,084
9,157
8,927

36,145
16,42919,716
9,567
10,149

9
66
(3)
(815)
−
3
(740)
8,187

16
54
(4)
(778)
234
(166)
(644)
9,505

77
562
(26)
(6,938)−25(6,300)69,694

2,997
237
3,234
4,953

4,023
(37)
3,986
5,519

25,513
2,017
27,53042,164

316,898
162,952
153,946
77,95275,994

Other income (deductions):
Interest income
Dividend income
Interest expenses
Equity in losses of affiliates
Gain on sale of investments in securities (note 4)
Other, net
Income before income taxes
Income taxes (note 9)

Current
Deferred￥

Net income

￥
Yen

2006

2005

$

U.S. dollars(note 2)
2006

Per share of common stock (note 1(m)):

Net income – basic
Cash dividends applicable to the year

￥

48.93
24.00

￥

54.08
7.00

$

0.42
0.20

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Japan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2006 and 2005
Millions of yen
2006

2005

Thousands of
U.S. dollars(note 2)
2006

Common stock (note 10):

Balance at beginning of year
Balance at end of year￥

10,00010,000￥10,00010,000$85,12885,128Additional paid-in capital (note 10):

5,182
5,182

5,182
5,182

44,113
44,113

Cash dividends
Bonuses to directors and corporate auditors
Addition (deduction) of revaluation of land
Net income
Balance at end of year

107,473−(2,389)
(172)
7
4,953
109,872

101,927
1,004
(698)
(115)
(164)
5,519
107,473

914,897−(20,337)(1,464)60
42,164935,320

Gain on revaluation of land at end of year

143

151

1,217

(5,751)

3,784(48,957)

(484)

(253)

(4,120)￥ 118,962￥ 126,337$ 1,012,701

Balance at beginning of year
Balance at end of year
Retained earnings (note 11):

Balance at beginning of year

Increase resulting from an affiliate newly accounted for by the equity method

Net unrealized gain (loss) on other securities
at end of year (note 4)
Treasury stock at end of year

Total stockholders’ equity at end of year
See accompanying notes to consolidated financial statements.

24

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ANNUAL REPORT 06.9.1 10:37 AM ページ 25

FINANCIAL SECTIONCONSOLIDATED STATEMENTS OF CASH FLOWSJapan Securities Finance Co., Ltd. and Consolidated Subsidiaries for the years ended March 31, 2006 and 2005
Thousands of
U.S. dollars(note 2)
2006

Millions of yen
2006

2005

Cash flows from operating activities:

Income before income taxes
Adjustments to reconcile income before income
taxes to net cash provided by (used in) operating activities:
Depreciation and amortization(Gains) losses relating to short-term investments andinvestments in securities
Allowance for doubtful receivables
Decrease in liabilities for retirement andseverance benefits
Interest and dividend income
Interest expenses
Equity in losses of affiliates
Increase in short-term loans receivable
Decrease in call loans(Increase) decrease in collateral money for securities borrowed
Increase (decrease) in call money
Decrease in bills soldIncrease (decrease) in borrowings
Increase (decrease) in payables under repurchase agreements
Decrease in commercial paper
Increase in collateral money received for securities lent
Increase (decrease) in collateral money received for loantransactions
Purchase of short-term investments
Proceeds from sale/redemption of short-term investments
Other, net
Sub totalInterest and dividend received
Interest paid
Income taxes paid
Net cash provided by (used in) operating activities

￥

8,187

￥

9,505

$

69,694

1,627
2,380

1,488
(1,127)

13,85020,261

(21)
(229)

376
(61)

(179)
(1,949)(16,481)1,529
815(666,853)
18,000369,675
554,200(1,462,700)
618,000
87,723(172,000)
134,261
24,773(15,396)
1,544
778(47,743)
197,000(192,381)(18,200)(326,500)(261,500)(55,568)(38,000)
319,181(15,294)(140,300)
13,016
6,938(5,676,794)
153,231
3,146,974
4,717,800(12,451,690)
5,260,918
746,770(1,464,204)
1,142,939
210,888(6,846,295)
7,173,246
72,341(97,822)
16,551(1,553)(4,941)(87,765)(12,190,039)
12,778,649(95,196)
51,516
16,382(1,470)(3,344)63,084(58,281,221)
61,064,493
615,825(832,740)
140,895(13,220)(42,062)(747,127)

(157)
100
(1,110)(580)(0)(1,747)

(226)
659
(732)
(1,680)227(1,752)(1,337)851(9,449)(4,937)(0)(14,872)

Dividends paid to stockholders
Other, net
Net cash used in financing activities(2,389)(231)(2,620)

(698)
(45)
(743)

(20,337)(1,966)(22,303)

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

(92,132)
95,956

60,58935,367(784,302)
816,855

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:

Cash and cash equivalents at end of year (note 3)￥

See accompanying notes to consolidated financial statements.

25

3,824

￥

95,956$32,553

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 26

NOTES 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 accepted inJapan, 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 thefinancial statements issued domestically in Japan in orderto present them in a form which is more familiar toreaders 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(3 subsidiaries for 2006 and 2005).
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 excess of cost over the underlying net assets atthe dates of investments in subsidiaries is amortized over
5 years.
(c) Cash and Cash Equivalents
For the purpose of the statements of cash flows, theCompany considers all highly liquid investments withinsignificant 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 ofstockholders’ equity. Realized gains or losses on the othersecurities are determined by the moving average method.
Bond securities classified as “other securities” for which fairvalue is not available are stated at the amortized cost.
Equity securities classified as “other securities” for which fairvalue is not available 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 decliningbalance method 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 andamortized by the straight-line method over estimateduseful lives (5 years). Intangible assets other thansoftware are deferred and amortized by the straight-line
method at rates based on the estimated useful lives of therespective assets.
(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

26

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 27

FINANCIAL SECTION

of retained earnings with respect to a given financial
period is made by the resolution of stockholders at a
general meeting to be held subsequent to the close of suchfinancial period. The accounts for that period do not,therefore, reflect such appropriation. (See note 11)(m) Data per Common Share
Net income per share is computed on the basis of theweighted average number of shares of common stock
outstanding during the respective years. (See note 13)
Cash dividends per share are computed based on
dividends actually paid during the year. (See note 11)(n) Impairment of Long-lived Assets
Effective April 1, 2005, the Company and its consolidated
subsidiaries adopted a new accounting standard for the
impairment of fixed assets (“Opinion Concerning theEstablishment of an Accounting Standard for the
Impairment of Fixed Assets” issued by the BusinessAccounting Deliberation Council on August 9, 2002) andthe “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 prior years’
consolidated financial statements to conform to thepresentation used as of and for the year ended March 31,
2006.

employees.
Under the Accounting Standards for Retirement andSeverance Benefits, provisions have been made in theaccompanying consolidated financial statements based on
the present value of the projected future retirement andseverance benefits attributable to employee services
rendered by the end of the year, less amounts funded
under the pension plans.
(j) Leases
Finance leases, except for those where the legal title of theunderlying property is transferred from the lessor to thelessee 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 forunder the asset and liability method. Deferred tax assets
and liabilities are recognized for the expected future tax
consequences of events that have been included in thefinancial statements or tax returns. Under this method,deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income inthe 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 isrecognized in income in the period that includes theenactment date.
(l) Appropriation of Retained Earnings
Under the Commercial Code of Japan, the appropriation(2) FINANCIAL STATEMENT TRANSLATIONThe consolidated financial statements are expressed in Japanese yen. However, solely for the convenience of the reader, theconsolidated financial statements as of and for the year ended March 31, 2006 have been translated into United States
dollars at the rate of ¥117.47=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market on March 31,
2006. 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, 2006 and 2005 are as follows:
2005

Thousands of
U.S. dollars
2006

95,956
95,956$$

Millions of yen
2006

Cash
Cash and cash equivalents

￥
￥

3,824
3,824

￥
￥

32,55332,553(4) SHORT-TERM INVESTMENTS AND INVESTMENTS IN SECURITIESBalance sheet amount and net unrealized loss which are charged to income of trading securities as of March 31, 2005 are¥9,999 million and ¥1 million, respectively. As of March 31, 2006, the Company holds no trading securities.

27

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 28

Balance sheet amount, gross unrealized gain or gross unrealized loss and fair value of held-to-maturity securities as ofMarch 31, 2006 and 2005 are summarized as follows:
Balance sheet amountMarch 31, 2006
Government bond securities
Corporate bond securities
Others￥￥March 31, 2005
Government bond securities
Corporate bond securities
Others

￥
￥

15
―
―
15

￥

15
100
―
115

￥

Balance sheet amountMarch 31, 2006
Government bond securities
Corporate bond securities
Others$$Millions of yen
Gross unrealized gain
Gross unrealized loss

128
―
―
128

￥

￥

―
―
―
―

￥

―
―
―
―

￥

￥

￥

―
―
―
―
―
―
―
―

Fair value

￥

￥
￥

￥

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

$

$

―
―
―
―

$

$

―
―
―
―

15
―
―
15
15
100
―
115
Fair value

$

$

128
―
―
128

Acquisition cost, gross unrealized gain or gross unrealized loss and balance sheet amount of other securities with fair value
as of March 31, 2006 and 2005 are summarized as follows:
Acquisition cost

Millions of yen
Gross unrealized gain
Gross unrealized loss

Balance sheet amountMarch 31, 2006

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

1,234

￥

−

￥

234
−
−
29
6,161

￥

20,884
3−−
20,887

￥

2,871

￥

−

￥

2,841
29
−
15
5,756

￥

2,543
2
−
−
2,545

￥

5,898

1,974,980
10,000−80￥ 1,986,294
1,179

￥

￥

7,132

1,954,330
9,997
−
109
￥ 1,971,568

March 31, 2005

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

2,448,136
5,776
−
66
￥ 2,455,157
Acquisition cost

￥

4,050

2,448,434
5,803
−
81
￥ 2,458,368

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

Balance sheet amount$

50,208

$

$

1,992
−
−
247
52,447

March 31, 2006

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

10,505

16,812,633
85,128−681$ 16,908,947

28

$

−

$

177,782
25−−
177,80760,713

16,636,843
85,103−928$ 16,783,587

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 29

FINANCIAL SECTION

It is not practicable to estimate the fair value of securities as of March 31, 2006 and 2005 described bellow because of lackof market price and difficulty in estimating fair value.
Thousands of
U.S. dollars
2006

Millions of yen

Unlisted equity securities
Commercial paper

￥

2006

2005

727
47,992

￥ 624

−

$

6,189
408,547

Projected future redemption of other securities with maturities and held-to-maturity securities as of March 31, 2006 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￥ 1,307,946￥ 315,666￥ 265,675

57,989−￥ 1,365,935−−￥ 315,666

Due within one year

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

Due after ten years$ 11,134,298$2,687,205$ 553,818$ 2,261,641

493,650−$ 11,627,948−−$ 2,687,205−−$ 553,818−−$ 2,261,641

Bond securities:

Government bond securities
Corporate bond securities
Others￥￥65,057−−65,057−−￥ 265,675

Bond securities:

Government bond securities
Corporate bond securities
OthersFor the years ended March 31, 2006 and 2005, proceeds from sale of other securities are ¥4,449,469 million ($37,877,492
thousand) and ¥9,784,248 million, the gross realized gains are ¥1,722 million ($14,659 thousand) and ¥4,969 million, andthe gross realized losses are ¥4,243 million ($36,120 thousand) and ¥3,825 million, respectively.

(5) INVESTMENTS IN AFFILIATES
The aggregate carrying amount of investments in affiliates as of March 31, 2006 and 2005 are ¥14,701 million ($125,147
thousand) and ¥14,613 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 in a
separate component of stockholders’ equity net of related taxes, and the related deferred tax liabilities are reported inliabilities as deferred tax liabilities for land revaluation.
The book value of the land was revaluated at ¥830 million at March 31, 2002. The value of the land at March 31, 2006
decreased by ¥177 million ($1,507 thousand) in comparison with the book value of the land after the revaluation.

29

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 30(7) DEBTThe composition of debt and the weighted average interest rate on debt as of March 31, 2006 and 2005 are as follows:
Millions of yen

Thousands of U.S. dollars

Weighted average rate

March 31, 2006

Short-term borrowings
Long-term borrowings
Call money
Bills soldPayables under repurchase agreements
Other￥ 1,577,820

4,500
1,964,400
672,400
114,420
1,914￥ 4,335,454$ 13,431,685
38,30816,722,567
5,724,015
974,036
16,293$ 36,906,904

Millions of yen

0.067%
0.194
0.021
0.016
0.087
1.375
Weighted average rate

March 31, 2005

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

￥

￥

0.085%
0.162
0.013
0.001
0.026
0.001
1.375

959,8202,500
1,410,200
2,135,100
172,000
26,6982,114
4,708,432(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 andunfunded 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: the Japan
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 and 2005 are estimated to be ¥938 million ($7,985 thousand) and ¥778 million, respectively.
The funded status of the pension plans as of March 31, 2006 and 2005 is outlined as follows:
Millions of yen
2005

2006

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

￥

￥

30

(7,677)
3,929(3,748)534(3,214)51(3,265)￥￥(7,832)
3,327(4,505)
1,178(3,327)59(3,386)

Thousands of
U.S. dollars
2006$ (65,353)
33,447(31,906)
4,546(27,360)434$ (27,794)

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 31

FINANCIAL SECTION

Net periodic pension cost for the years ended March 31, 2006 and 2005 consists of the following components:
Thousands of
U.S. dollars
2006

Millions of yen
2006

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

￥

2005

240
159
(71)
169
―
497

￥

￥

258
154
(54)
168
(142)
384

￥

$

2,043
1,353
(604)
1,439
―
4,231

$

Significant assumptions of pension plans used to determine these amounts in fiscal 2006 and 2005 are as follows:
Periodic allocation method for projected benefit
Discount rate
Expected rate of return on plan assets
Period for amortization of unrecognized prior service cost
Period for amortization of unrecognized actuarial loss

2006

2005

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

Straight-line
Mainly 2.0%
Mainly 2.0%
*See below note
Mainly 15 years

Note: *Amortized in the year in which they were generated

Directors and corporate auditors are not covered by the plans described above. For such persons, the Company and its
certain subsidiaries have unfunded defined benefit pension plans. Under the plans, directors and corporate auditors areentitled 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 wereto retire or sever immediately at the balance sheet dates. As of March 31, 2006 and 2005, the liabilities for retirement andseverance benefits related to the plans were ¥659 million ($5,610 thousand) and ¥767million, 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 2006 and 2005.
The reconciliation of the statutory tax rate and the effective tax rate as a percentage of income before income taxes forthe years ended March 31, 2006 and 2005 is not subject to disclosure as the difference between the rates is less than 5%.
Significant components of deferred tax assets and liabilities at March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2006

2005

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

￥

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

￥

228
245
1,233
312
529
1,035
226
3,808

$

1,566
2,052
10,4372,281
3,899
72,367
1,856
94,458Deferred tax liabilities:

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

Net deferred tax assets

31

(182)
(2,508)(85)(2,775)
8,321

￥

(182)
(2,343)(44)(2,569)1,239$(1,549)(21,350)(724)(23,623)
70,835

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 32

Net deffered tax assets and liabilities as of March 31, 2006 and 2005 are reflected in the accompanying consolidatedbalance sheets under the following captions:Thousands of
U.S. dollars
2006

Millions of yen
2006￥

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

2005

856
7,465
―

￥

1,014
450
(225)

$

7,287
63,548―(10) COMMON STOCK
Under the Commercial Code of Japan, the entire amount of the issue price of shares is required to be designated as statedcommon stock account although a company in Japan may, by resolution of its Board of Directors, account for an amountnot exceeding 50% of the issue price of new shares as additional paid-in capital. On October 1, 2001, the Commercial
Code of Japan was amended to eliminate the provision of common stock par value resulting in all common stock being
recorded with no par value.

(11) RETAINED EARNINGS AND DIVIDENDS
The Commercial Code of Japan provides that an amount equal to at least 10% of appropriations paid in cash should beappropriated as a legal reserve until an aggregated amount of such reserve and additional paid-in capital equal 25% ofcommon stock. Either additional paid-in capital or the legal reserve may be available for dividends by resolution of thestockholders to the extent that the amount of total additional paid-in capital and legal reserve exceeds 25% of statedcommon stock. Balances of the legal reserve are included in retained earnings in the accompanying consolidated balance
sheets.
The amount available for dividends is based on the amount recorded in the Company's non-consolidated books ofaccount in accordance with the Commercial Code of Japan.
In accordance with the Commercial Code of Japan, proposed appropriations of retained earnings have not been reflectedin the financial statements at the end of each fiscal year. The proposed appropriation of retained earnings at March 31,
2006 of cash dividends of ¥14 ($0.12) per common share aggregating ¥1,391 million ($11,841 thousand) was approved at
the Company’s general meeting of stockholders held on June 28, 2006.

(12) GENERAL AND ADMINISTRATIVE EXPENSES
Significant components of general and administrative expenses are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2006

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

32

￥

3,148
424
197
1,197
1,490

2005

￥

3,187
323
203
1,265
1,476

$

26,7983,609
1,677
10,19012,684

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 33

FINANCIAL SECTION(13) NET INCOME PER SHARE INFORMATIONThe reconciliation of the numbers and the amounts used in the basic net income per share computations for the years ended
March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2006

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

2005

￥

4,953

￥

5,519

$

42,164

￥

(123)
4,830

￥

(172)
5,347

$

(1,047)
41,117

Number of shares(Thousands)
2006
2005

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

98,867

98,707(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, 2006 and 2005 are as follows:(a) Lessee(i) Acquisition cost, accumulated depreciation and net book value of leased assets, if they had been capitalized:
Millions of yen
2006

Furniture and fixtures:
Acquisition cost
Accumulated depreciation
Net book value

￥
￥

2005

348
(281)
67

￥
￥

358
(222)
136

Thousands of
U.S. dollars
2006

$

2,962
(2,392)$570(ii) Lease expense and future minimum lease payments including interest expense:
Millions of yen
2006

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

Thousands of
U.S. dollars
2006

￥

84

￥

109

$

715

￥

46
21
67

￥

83
53
136

$

391
179
570

￥

33

2005

￥

$

0806

ANNUAL REPORT 06.9.1 10:37 AM ページ 34(b) Lessor(i) Acquisition cost, accumulated depreciation and net book value of leasing assets:
Millions of yen
2006
Furniture and fixtures Others

Acquisition cost
Accumulated depreciation
Net book value

￥

119
(88)
￥
31

69
(46)
23

Total

2005
Furniture and fixtures Others

Total

71
(34)
37

287
(185)
102

188
(134)
54

￥

216
(151)
￥
65

Thousands of U.S. dollars
2006
Furniture and fixtures Others
Total$ 1,013

(749)
$ 264

587 1,600(391) (1,140)
196
460(ii) Lease income, depreciation and future minimum lease payments including interest income:Thousands of
U.S. dollars
2006

Millions of yen
2006

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

2005

￥

63
30

￥

92
47

$

536
255

￥

38
24
62

￥

62
57
119

$

324
204
528

￥

￥

$

(15) PLEDGED ASSETS
The carrying value and classification of assets owned by the Company that have been pledged to counterparties as of March
31, 2006 and 2005 are as follows:
2006

2005

Thousands of
U.S. dollars
2006￥ 1,324,872￥ 1,075,295$ 11,278,386

503,441
29,0001,325,494
98,477595,341

819,650
120,000
523,524
175,529
1,252,428

4,285,698
246,872
11,283,681
838,316
5,068,026

Millions of yen

Short-term investments
Short-term loans receivable
Securities in custody
Securities in deposit
Collateral money for securities borrowed
Investments in securities
Assets in the above table were pledged for the followings:

Millions of yen

Call money
Bills soldPayables under repurchase agreements
Collateral money received for securities lent
Securities borrowed

2006

2005

￥ 1,395,100￥ 892,000

672,400
114,420
169,749
98,4772,135,100
26,698599,998
162,996

Thousands of
U.S. dollars
2006$ 11,876,224
5,724,015
974,036
1,445,041
838,316

In addition to the above, securities received as collateral for loans receivable amounting to￥1,405,560 million were
deposited as guarantee for liabilities at March 31, 2005, and securities received as collateral for securities loaned transaction
and securities received as collateral for bond borrowing and lending transaction with cash collateral amounting to￥2,693,541 million ($22,929,608 thousand) are deposited as guarantee for liabilities at March 31, 2006. And short-term
investments of ￥15,998 million ($136,188 thousand), other current assets of ￥500 million ($4,256 thousand) andinvestments in securities of ￥5,548 million ($47,229 thousand) are deposited to the Clearing Fund of Japan Securities
Clearing Corporation and Japan Government Bond Clearing Corporation at March 31, 2006.

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ANNUAL REPORT 06.9.1 10:37 AM ページ 35

FINANCIAL SECTION

The fair value of the securities received as collateral for bond borrowing and lending transaction with cash collateraland securities borrowed under loan for consumption agreement as of March 31, 2006 and 2005 are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2005

2006

￥

Securities loaned
Securities pledged as collateral
Securities on hand

108,701
1,584,601
177,519￥ 1,281,018$

882,855
145,457

925,351
13,489,410
1,511,186(16) COMMITMENTS AND CONTINGENCIESAs of March 31, 2006 and 2005, undrawn amount of general loan for securities companies and customers and overdraft
loan are as follows:
Thousands of
U.S. dollars
2006

Millions of yen
2006￥ 591,644

Total credit line
Drawn amount
Undrawn amount(54,879)￥ 536,765

2005￥

576,189(38,937)￥ 537,252$ 5,036,554(467,175)$ 4,569,379(17) SEGMENT INFORMATION(a) Industry segments
Operations by business group are summarized as follows:
Securities finance Data processing service

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

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

￥

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

￥
￥

Securities finance Data processing service

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

33,17817
33,19523,004￥
10,191￥ 9,227,861
1,348
2,369

Millions of yen
2006
Total

￥

37,22675
37,301
28,360￥8,941￥9,722,427
1,636
1,704
Millions of yen
2005
Total

2,967 ￥ 36,145
131
114
36,276
3,081
26,122
3,118
10,154(37) ￥
2,152 ￥ 9,230,013
1,494
146
2,441
72

￥

￥
￥

35

Elimination / corporate￥￥￥

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

Elimination / corporate￥￥￥

Consolidated

Consolidated

36,145― ￥―(131)
36,145(131)
25,996(126)
10,149(5) ￥(39) ￥ 9,229,974
1,488
(6)
2,412
(29)

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ANNUAL REPORT 06.9.1 10:37 AM ページ 36

FINANCIAL SECTION

Thousands of U.S. dollars
2006
Securities finance Data processing service
Total
Elimination / corporate

Revenues from outside customers
Inter-segment revenues
Operating expenses
Operating income
AssetsDepreciation and amortization
Capital expenditures$

291,428144
291,572
215,817$75,755$ 82,746,684
13,11814,157$25,470494
25,96425,606358
18,507
809
349

$
$

$

316,898638
317,536
241,423$
76,113$ 82,765,191
13,927
14,506

$

$
$

―
(638)
(638)
(519)
(119)
(374)
(77)
(119)

Consolidated$

316,898―
316,898
240,904$
75,994$ 82,764,817
13,85014,387

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, 2006 and 2005.
(c) Overseas sales
Not applicable.

(18) SUBSEQUENT EVENT(a) Corporate separation of JSF Information Technology Co., Ltd. (JSFIT) and sale of JSFIT shares
JSFIT and Nihon Building Co., Ltd. (Nihon Bldg), both are consolidated subsidiaries of the Company, agreed to separate
and transfer a part of business of JFFIT to Nihon Bldg. On April 28, 2006, the Board of Directors of the Company
approved the subsidiaries’ decision. The corporate separation will become effective July 1, 2006.
Currently, 82.5% of JSFIT shares are owned by the Company and 17.5% are owned by Nihon Bldg. The Company
and Japan Information Processing Service Co., Ltd. (JIPS), which is an affiliate of the Company accounted for by the equity
method, agreed to transfer a part of JSFIT shares owned by the Company and whole JSFIT shares owned by Nihon Bldg to
JIPS on July 3, 2006. As a result of the transfer, 65% of JSFIT outstanding shares will be owned by JIPS.
These corporate restructurings are to increase business efficiency by proper concentration of group resources and toutilize the capital in group effectively.

(b) Business integration of affiliates
JIPS and Japan Securities Agents, Ltd. (JSA), both are affiliates of the Company accounted for by the equity method,agreed on May 16, 2006, at their Board of Directors to establish a joint holding company, JBIS Holdings Inc. (JBIS) bytransfer their shares on October 1, 2006. JBIS will be listed in Tokyo Stock Exchange on October 2, 2006.
1 share of JBIS common stock will be allotted to 1 share of JIPS common stock. 1.3 share of JBIS common stock willbe allotted to 1 share of JSA common stock. JBIS will be an affiliate of the Company accounted for by the equity method.

36

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ANNUAL REPORT 06.9.1 10:37 AM ページ 37

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, 2006 and 2005, and related consolidated statements of income, stockholders’ equity and cash
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 made bymanagement, 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, thefinancial position of Japan Securities Finance Co., Ltd. and consolidated subsidiaries as of March 31, 2006 and 2005, andthe results of their operations and their cash flows for the years then ended in conformity with accounting principles
generally accepted in Japan.
As more fully described in Note 18 to the consolidated financial statements, on April 28, 2006, the Board of Directorsof the Company approved the corporate separation of JSF Information Technology Co., Ltd. and the sale of a part of its
shares. Furthermore, on May 16, 2006, the Board of Directors of the Company approved that Japan Information Processing
Service Co., Ltd. and Japan Securities Agents, Ltd. will establish a joint holding company by the transfer of their shares.
The accompanying consolidated financial statements as of and for the year ended March 31, 2006 have been translated
into United States dollars solely for the convenience of the reader. We have recomputed the translation and, in our opinion,
the consolidated financial statements expressed in yen have been translated into United States dollars on the basis describedin Note 2 to the consolidated financial statements.

Toyo & Co.
Tokyo, Japan
June 28, 2006

37

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ANNUAL REPORT 06.9.1 10:37 AM ページ 38

OUTLINE OF THE CORPORATE GROUP

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

Atfiliate•Trust services•Banking services for deposits and loans

SubsidiaryJapan
Securities
Finance Co., Ltd.

Japan Securities Agents, Ltd.
•Securities clearing agent•Transfer agent•Securities custody•PTS services

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

Affiliate

Affiliate

Netwing
Securities Co., Ltd.

Japan Information
Processing Service Co., Ltd.

•Securities business•Information processing services•Software development and sales•Information equipment sales

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ANNUAL REPORT 06.9.1 10:37 AM ページ 39

CORPORATE DATAJapan Securities Finance Co., Ltd.

Board of Directors and Corporate Auditors(As of June 28, 2006)

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*
Hisao Harada*
Sadamu Shimomura
Yasuhisa Hashimoto
Kunio Kojima
Takashi Imai **Akira Kanno **Eiichiro Okumoto **(* Representative Directors)(** Outside Directors)

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

Shares outstanding
99,704,000 shares (as of March 31, 2006)

Exective Officers
President
Executive Vice President
Senior Managing Director
Managing Directors

Number of shareholders
6,227 shareholders (as of March 31, 2006)

Senior Executive Officer
Executive Officer

Stock exchange listing
Tokyo Stock Exchange, 1st Section

Transfer agent
Japan Securities Agents, Ltd.
1-2-4 Nihonbashi-Kayabacho, Chuo-ku, Tokyo 103-8202
Tel: +81-3-3668-9211
Rating Information

Minoru Masubuchi
Hiroshi Saito
Hisao Harada
Sadamu Shimomura
Yasuhisa Hashimoto
Akira Onoda
Hiroshi Nasuno
Yukitaka Yoshida
Hiroshi Asakura
Shigeru Awashima

Long-term Rating(As of the end of July, 2006)
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)

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ANNUAL REPORT 06.9.1 10:37 AM ページ 40

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

40

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