financial statements - london stock exchange · 2014. 6. 18. · financial statements 2013 page 1...

This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013

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Financial Statements31 December 2013

Company Number : 1698498

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This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013 Page 3

Strategic ReportThe Strategic report is prepared in accordance with The Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013.

Principal activitiesMitsubishi UFJ Securities International plc (“MUSI” or “the Company” and, together with its subsidiaries, “the Group”) is the London-based international capital markets subsidiary of Mitsubishi UFJ Securities Holdings Co., Ltd. (“MUSHD”). MUSHD’s parent, and MUSI’s ultimate holding company, is Mitsubishi UFJ Financial Group, Inc. (“MUFG”). MUSI is active in the fixed income, equity, commodities, derivatives and structured finance markets.

Results The results for the year are set out on page 19 and the profit for the year, after tax, amounted to £4,712,000 (2012: Profit £36,988,000).

Business review and future developmentDespite difficult market conditions, the Group continued to perform well during 2013, recording the second highest annual revenues since incorporation. Following record revenues reported in 2012, the current year represented a transitional period for the Group, with the build out of the MUSHD International securities platform outside of Japan. The international business is carried out under a common management structure: the International Management Framework, with the integrity of each legal entity retained. Certain costs associated with this build out have been incurred by MUSI (refer to Note 2), with this investment impacting current year profitability. This platform will be the focus for business expansion in future years.

Throughout 2013, the Group continued to develop its product range and geographical reach. Areas of particular focus include new equity product offerings across derivatives and structured finance solutions. Key staff hires within front office and support functions represent tangible efforts to ensure MUSI is able to offer a breadth of financial solutions to the Group’s clients, optimise synergies across the MUFG group and execute business within defined risk parameters in a well-controlled environment.

Following considerable discussion with senior management at MUSHD and MUFG regarding the long term viability of the commodities business, in the current complex regulatory environment, the difficult decision to close down the commodities business in MUSI from the 1st quarter 2014 has been made. The Group is working with employees, clients and other MUFG entities to wind down the business in an orderly manner.

As the regulatory environment evolves, the Group continues to assess the impact on business process. The Group is required to manage and monitor its capital base to ensure that sufficient capital is available to support future business plans, the firm’s risk appetite and to meet regulatory requirements. During the year, the Group issued new subordinated loans totalling £956.3 million equivalent (JPY 166.0 billion). In addition, there was a concurrent early repayment of subordinated loans totalling £643.4 million equivalent (JPY 89.5 billion) and maturity of notes totalling £73.0 million equivalent (JPY 10.0 billion). The new loans carry a seven year maturity (refer to Note 13) and qualify for inclusion as Tier 2 capital.

During the year, Paul Hartwell served as the Group’s Chief Executive Officer (“CEO”) from 25th February to 13th September. David King, the Group Chief Financial Officer, performed the role of interim CEO from 1st January to 25th February and resumed this responsibility on 13th September.

Challenges and uncertaintiesThe Group faces a number of challenges and uncertainties in the normal course of business. Operational risks are inherent in the Group’s business activities and are covered in more detail under Business and Risk Management Policies on pages 11 to 18. Other uncertainties faced by the Group in the course of its business include: liquidity, funding and market risks; the valuation of financial assets and liabilities in volatile markets; exposure to macro-economic and geopolitical uncertainty; and changes to regulatory rules regarding market practices and regulatory capital.

The Group is exposed to the Japanese market through its debt issuance programme and its investment in high quality Japanese Government securities. The business activities of the ultimate parent company MUFG, whilst carried out on a global level, are focused in the Japanese market. Any downgrade of Japanese debt or severe loss of confidence in the Japanese economy, could impact the results of MUSI. Management are fully aware of these risks and have plans in place to mitigate any impact.

By order of the Board

Richard HouseSecretary

14th March 2014

25 Ropemaker StreetLondon EC2Y 9AJ

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This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013 Page 5Page 4 Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.

Directors’ ReportThe Directors present their annual report and financial statements for the year ended 31st December 2013.

DirectorsThe Directors during the year were as follows:

Akira Kamiya *Paul Hartwell (occupied role between 25th February and 13th September 2013)Clifford De Souza *Shoji Nakano *Takashi Morisaki * Malcolm Aish *Diane Moore * (appointed 1st April 2013)Nobuyuki UchidaDavid KingRichard Davies (occupied role until 1st March 2013)

* Non-executive Directors

Mr De Souza’s contract with MUSHD expires on 31st March 2014 and he is expected to cease his role as Director of the Company on the same day.

DividendThe Directors recommend that no dividend be paid for the year ended 31st December 2013 (2012: £Nil).

Directors’ and officers’ indemnitiesThe Company maintains insurance against liabilities for all Directors and officers of the Company and wholly owned subsidiary companies during the financial year and at the date of this report.

CompensationCertain employees’ discretionary remuneration is deferred where the reward exceeds thresholds set by the remuneration committee, based on guidelines set out by our UK regulator, the Prudential Regulation Authority (“PRA”). Some of these deferrals take the form of Notional Stock Units (“NSU”), which track the performance of MUFG shares.

EmployeesIt is the policy of the Group to give full and fair consideration to applications for employment from disabled persons, to continue wherever possible the employment of members of staff who may become disabled and to ensure that suitable training, career development and promotion are encouraged. The Group places considerable value on the involvement of its employees, has continued to keep them informed on personnel policies or issues, matters affecting them as employees and on the various factors affecting the performance of the Company and the Group. This is achieved through formal and informal meetings, the Group intranet and regular internal communications. Employee representatives are consulted regularly on a wide range of matters affecting their current and future interests. These communications help to achieve a common awareness amongst employees of the financial and economic factors affecting the performance of the Group and the broader MUFG companies.

Corporate social responsibility The Group builds on the culture of the MUSI brand by coordinating and managing practices to maximise positive social contribution, giving back to the local community, inspire future generations and consider its impact on the surrounding environment. We support a variety of local charities through volunteering, donations and continue to support employees’ charitable activities through our well-established employee charity donation matching and “Give As You Earn” schemes. The corporate focus for 2014 is to continue to promote social responsibility and further embed the programme in the Group’s culture.

Disclosure of information to the auditorThe Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are each aware, there is no relevant audit information of which the Group’s auditor is unaware; and each director has taken all the steps that he ought to have taken as a director to make himself aware of any relevant audit information and to establish that the Group’s auditor is aware of the same information.

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This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013 Page 7Page 6 Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.

Statement of Directors’ Responsibilities in Respect of the Strategic Report, Directors’ Report and the Financial StatementsThe Directors are responsible for preparing the Strategic Report, the Directors’ Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the Group and parent company financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of their profit or loss for that period. In preparing each of the Group and Company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently

• make judgements and estimates that are reasonable and prudent

• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Richard HouseSecretary

14th March 2014

25 Ropemaker StreetLondon EC2Y 9AJ

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Page 8 Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013 Page 9

Independent Auditor’s Report to the Members of Mitsubishi UFJ Securities International PlcWe have audited the financial statements of Mitsubishi UFJ Securities International Plc for the year ended 31st December 2013 which comprise the Consolidated Profit and Loss Account, the Consolidated Balance Sheet, the Consolidated Statement of Total Recognised Gains and Losses, the Accounting Policies and the related explanatory notes, and the Business and Risk Management Policies. The financial reporting framework that has been applied in their preparation is applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).

This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 7, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.

Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/auditscopeukprivate.

Opinion on financial statements In our opinion the financial statements:

• give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31st December 2013 and of the Group’s profit for the year then ended;

• have been properly prepared in accordance with UK Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of the Companies Act 2006.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Strategic Report and Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements.

Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept by the Company, or returns adequate for our audit have not been received from branches not visited by us; or

• the Company financial statements are not in agreement with the accounting records and returns; or

• certain disclosures of directors’ remuneration specified by law are not made; or

• we have not received all the information and explanations we require for our audit.

Karyn Nicoll (Senior Statutory Auditor)

For and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square, Canary Wharf, London E14 5GL

14 March 2014

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Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules. Financial Statements 2013 Page 11

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Business and Risk Management PoliciesRole of Financial Instruments

a) The nature and purpose for which financial instruments are held

The Group maintains positions in financial instruments for the following principal reasons:

• as a result of the sale or assignment of structured or derivative positions to our clients (usually on the over-the-counter market)

• as agent for its customers in the purchase, sale and assignment of securities and derivatives

• for trading or arbitrage purposes

• to take long term strategic positions

• to hedge positions in our own books created by the business noted above

b) An explanation of objectives, policies and strategies relating to financial instruments including economic hedging

The majority of the financial instruments result from the Group’s normal market activities and are held as part of portfolios that are maintained and monitored by instrument or risk type. The risk appetite is set by the Board and individual trading areas are allocated risk limits based on a wide range of market factors and are required to maintain portfolios within those limits. As such they are responsible for maintaining hedges in the portfolios.

The development of new business is subject to a new product approval process, which aims to encourage the proactive identification of risks and rewards before the Group transacts in new financial instruments or services. This process includes the setting of any limits applicable to the new business.

A more detailed explanation of risk strategy and factors is given below.

There have been no significant changes in the factors noted above as compared to the previous accounting period.

Risk ManagementThe responsibility for risk management resides with the Board, with support from the Board Risk Committee. Day-to-day risk management of all risks, with the exception of compliance and legal risk, resides with the Chief Risk Officer (‘CRO’), who reports directly to the Chief Executive Officer and the Board Risk Committee. Market, credit, operational and model risk are overseen by the Risk Management Committee supported by its underlying working groups. Valuation risk is overseen by the Finance Working Group. Liquidity risk is overseen by the Asset and Liability Committee (‘ALCO’).

Compliance risk and legal risk are overseen by the Operational Controls Committee. Compliance risk management resides with the Head of Compliance, who also reports directly to the Chief Executive Officer. Legal risk management resides with the Head of Legal, who also reports directly to the Chief Executive Officer.

Each of these Committees and the Finance Working Group report to the Executive Committee, which reports directly to the Board. In addition, the Risk Management Committee reports to the Board Risk Committee.


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Risk Management Strategy

As part of the Group’s business strategy, the Board considers the risks to which the Group is exposed, and specifies an appetite and management strategy for each of these risks. The major risks are market, credit, operational and liquidity risk, including concentration risk. Further risks arise from the management of capital. These risks are defined and discussed in further detail on the following pages. The firm’s activities also expose it to business, strategic and group risk, reputational risk, conduct, compliance and legal risk.

The Group’s governance of risk is based on the “three lines of defence” approach.

1. Business Management – Front Office and functional support departments

• Department Heads and all Front Office staff are responsible for managing the risks inherent in their business activities

• Supervision, ensuring competence and training of their staff and

• Escalate risk issues to the Executive Committee, Management Committee, Risk Management Committee, or the Operational Controls Committee.

2. Challenge and Risk Control – Risk Management Departments and other control support departments

• Independent of Front Office, led by the Chief Risk Officer (CRO), Chief Financial Officer (CFO) and Chief Compliance Officer (CCO)

• These enable MUSI to maintain a system of checks and balances

• Risk issues are escalated to the Risk Management Committee, Asset and Liability Committee (ALCO), Operational Controls Committee and where appropriate to the Executive Committee and

• Risk Management and the Risk Management Committee have a reporting line to the Board Risk Committee, independent of the CEO.

3. Assurance – Internal Audit

• Assurance role carried out by Internal Audit

• Independent opinion to Senior Management and the Audit Committee of the Board

• Objective appraisal of the adequacy and effectiveness of the internal control systems designed and installed by Senior Management and

• Reports to management on whether the control systems are fulfilling, or are likely to fulfil, the control objectives of MUSI.

In addition to the Risk Appetite Statement, the governance of each risk is described in the Risk and Capital Management High Level Policy and supporting policies set by the Group and by MUSHD. The objectives of the High Level Policy and supporting policies are to:

Enterprise Risk Management

• engage in business activity within the constraints imposed by the Risk Appetite of the MUSI Board

• diversify revenue and risks arising from both client and proprietary business

• identify and minimise regulatory risks

• improve risk-adjusted returns

• employ effective risk management systems

• identify exogenous emerging risks

Specific Risk Management

Market Risk

• identify, capture, measure, monitor and report key market risks

• accurately value positions, including reserves

Credit Risk

• identify, quantify, monitor and control credit risk exposure

• provide sufficient, timely and relevant data of credit risk exposure by counterparty across all product classes and against each respective approved credit limit

• maintain static data for all counterparties

• produce timely credit risk reports as appropriate

• mitigate credit risk by receiving collateral in accordance with the MUSI Collateral Policy

• provide credit portfolio monitoring and analysis

*Treasury, Finance and Product Control report operationally to the CFO, but their risk is reported to the CRO.

The Group’s risk management structure as at 31st December 2013 is illustrated below:

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Liquidity and Valuation Risk Legal Risk Regulatory

Compliance Risk

Operational Controls Committee

Risk Management Committee

Project Committee

Asset & Liability Committee

Board

Chief Executive Officer

Chief Risk Officer MLRO Head of Compliance

Risk Analytics Group

Credit Risk Management

Market Risk Management

Prudential Risk Management

Operational Risk Management

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Finance*

Product Control*

Compliance

Head of Legal

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Executive Committee

Remuneration Committee

Board Risk Committee

Management Committee

Business and Risk Management Policies (continued)

*Treasury, Finance and Product Control report operationally to the CFO, but their risk is reported to the CRO.


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Risk Management Strategy (continued)

Operational Risk

• establish a firm-wide risk-aware environment to enable the identification, monitoring and management of our current operational risks within agreed appetite

• support the business to grow safely

• provide assurance to our key internal and external stakeholders

Reputational Risk

• maintain an appropriate standard of business ethics and conduct consistent with zero tolerance of material reputational risk exposure

• comply with applicable laws and regulations

• provide satisfactory service to clients

• conduct business with counterparties professionally at all times and in good faith

Liquidity Risk

• identify, measure, manage and monitor liquidity risk

• mitigate liquidity risk by stress testing through identifying appropriate liquidity risk drivers

• establish contingency funding plans

• keep liquid buffer assets Group RiskDefined as the risk of loss due to the linkages between MUSI and other entities within MUFG. The risk covers contagion of problems between group companies, business flow reliance and reliance on support from the Group.

• to mitigate potential group risk to MUSI through, inter alia:

• businessdiversification

• presenceofMUSImanagementwithinMUFG

• standaloneoperationandcapitalisation

• independentsourcesoffunding

• produce contingency plans to help to prepare for events at other MUFG companies

Conduct RiskDefined as the risk of creating detriment to a client, counterparty, market or other stakeholders arising from inappropriate conduct of business.

• to maintain appropriate controls and procedures that support the efficient and effective conduct of the markets in which Group participates and which protect the interests of our clients and other stakeholders

Capital Management

• hold sufficient economic capital resources to support the risks that MUSI engages in, as defined by economic capital requirements, and to maintain an economic capital ratio that is consistent with meeting this objective

• maintain a regulatory capital base that exceeds the minimum capital ratio at all times; in pursuing this objective an appropriate target range for the regulatory capital ratio should be observed, taking into account Individual Capital Guidance

• identify an appropriate capital plan to ensure that these objectives are maintained over the three year business plan horizon, whilst taking into account the risk to the central projection of the business plan

• manage the relative proportions of the constituent parts of internal available and regulatory capital such that MUSI meets these objectives in an efficient manner

Future Regulatory DevelopmentsIn June 2013, the European Commission published the final text for the new Regulation and Directive, known collectively as CRD IV to give effect to the Basel III framework in the EU. CRD IV will be effective from the 1st January 2014 and the Group has ensured that capital and liquidity plans take into account the anticipated effects of the changes.

Management of Primary Risk Types

Market RiskMarket risk is the risk that the Group makes losses from movements in market prices in the trading portfolio.

Market risk is managed on a daily basis through the Market Risk Management department and the Risk Analytics Group. The Group uses a wide range of techniques to manage the market price risk in its trading book, including Value at Risk (VaR) methodologies. The VaR of a trading book is

Management of Primary Risk Types (continued)

the estimate of the potential loss on risk positions as a result of movements in market rates and prices over a specific time horizon and to a given confidence level. The Group uses VaR methodologies to monitor the price risks arising from different trading books and across portfolios. Actual profit and loss outcomes are also monitored to test the validity of the assumptions made in the calculation of VaR. During 2013 the internal VaR calculation was migrated from a 5 year lookback period to a 2 year lookback period based on a full historical simulation model. This was implemented to bring the Group in line with the methodology employed by the industry. A concurrent rebasing of internal VaR limits was undertaken, in order to incorporate the methodology change. MUSI additionally calculates a stressed VaR measure using an appropriately stressful 1 year lookback period as required by the PRA.

Assuming a 99% confidence level and a 1-day holding period, the internal VaR for the Group’s trading book as at 31st December 2013 was £2.2 million (2012 £2.8 million). This means that, on the basis of the risks as at 31st December 2013, the Group expected not to incur a loss of more than £2.2 million in any 1-day period more than 1% of the time. The average, highest and lowest VaR during 2013 were £4.1 million, £6.7 million and £1.3 million respectively. The change in methodology does not provide for a full comparison to prior year. In 2013 the number of occasions on which actual trading book outcomes exceeded the previous day’s VaR was within the expected bounds of the model.

The Group recognises that VaR measures of market price risk, considered in isolation, have limitations. It is for this reason that the Group uses a wide range of other risk limits, for example stop-loss limits, position limits and risk factor sensitivity limits, to manage its market risk exposures. The Group additionally performs single risk factor and scenario analysis to identify any vulnerabilities in the portfolio. The VaR figures disclosed above have the following limitations:

• The historical data on which the calculations have been based may not reflect all the factors that are relevant to the estimation of VaR, give the correct weight to these factors, or be the best estimate of risk factor changes that will occur in the future

• Focusing on the maximum loss that is expected to be incurred 99% of the time says little about the smaller losses that are expected to be incurred more frequently, or the larger losses in excess of VaR that are expected to be incurred less than 1% of the time

• All the VaR figures disclosed above are based on calculations performed at the end of each business day. The VaR during the course of a single day may change substantially, and the end-of-day figure may not be representative of the figure at other times of the day.

The Group’s VaR is determined by combining the following components: Interest Rate VaR (Curve, Vega and Asset Spread), Currency (FX) VaR, Commodity VaR, Equity VaR, Inflation VaR and Basis VaR. The table below shows the internal VaR range for the year ended 31st December 2013:

Interest Rate Risk

Total Interest Rate VaR is the risk of loss arising from three different forms of interest rate movement:

• Pure Interest Rate (Curve) Risk

• Interest Rate Volatility (Vega) Risk

• Asset Spread Risk

Currency RiskThe Group trades in a multi-currency environment and this results in FX risk. The Group measures this using FX VaR that includes 2 different forms of FX risks:

• FX Price Risk (potential loss arising from market moves of FX rates)

• FX Volatility Risk (potential loss arising from market moves in FX volatility) A significant proportion of the Group’s FX Risk results from trades within the structured business.

31 December 2013 Close Average Maximum Minimum £m £m £m £m

Interest Rate Curve Risk 1.6 1.9 4.8 0.8

Interest Rate Vega Risk 0.8 0.7 1.0 0.4

Asset Spread Risk 1.3 2.7 3.8 1.3

Currency Risk 1.1 1.1 3.4 0.3

Commodity Risk 0.4 0.4 1.0 0.2

Equity Price Risk 1.7 1.0 2.7 0.3

Equity Vega Risk 0.7 0.6 0.9 0.2

Inflation Risk 0.3 0.4 0.5 0.2

Basis Risk 0.7 1.7 3.0 0.7

Diversification benefit (6.4) (6.4) (14.4) (3.1)

Total Value at Risk 2.2 4.1 6.7 1.3


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Commodity RiskThe Group trades financial derivatives based on energy, emissions, natural gas, metals and soft commodities. The Group’s Commodity VaR is the 99% 1-day loss due to commodity price and volatility movements.

Equity RiskThe Group takes equity positions in products including equities, baskets, convertibles, repos, structured notes, options, swaps and forwards.

Inflation Risk

Inflation products, including inflation linked bonds and swaps, expose the Group to changes in the rate of inflation.

Basis Risk

Basis VaR is an estimate of VaR attributable to basis swap, cross currency and other curve risks.

Credit Risk

Credit risk is the risk of loss resulting from client, issuer or counterparty default and arises on credit exposure in all forms, including settlement risk.

The Group manages its credit risks in accordance with its credit policies and these are endorsed by MUSHD. Counterparty exposure is actively managed through a process of credit risk assessment, limit setting and exception reporting, with credit policy determining the maximum exposure on a Group basis.

The Group assesses the default probabilities of individual counterparties by using a rating methodology incorporating external ratings, the market price of credit risk and internal analysis of counterparties.

Day to day responsibility for the management of credit risk rests with the Credit Risk Management department. Credit risk is managed and monitored on a daily basis in line with the credit policy and approved credit limits. The Credit Risk Working Group is chaired by the Head of Credit Risk Management and meets on a monthly basis to carry out a detailed portfolio review with a focus on risk concentrations relative to the Group’s own financial resources. This also includes a review of large exposures, exposure to lower rated issuers and counterparties, and exposure to higher risk industry and country sectors. The Credit Risk Working Group along with the Risk Management Committee reviews and authorises the implementation of new or changed credit policies. It also monitors and determines the appropriate level of the Credit Loss Reserve. Issues arising from the Credit Risk Working Group are reported at the Risk Management Committee meeting.

Credit exposure is normally measured on a net basis i.e. by taking account of received collateral and aggregating trades with both positive and negative values provided that a legally enforceable master netting agreement has been executed that permits close-out netting. To mitigate credit risk, the Group has Credit Support Annexes in place with the majority of its counterparties and guarantee arrangements in place with members of MUFG; risk is managed net of these guarantees.

Details of the Group’s credit exposures are included in Note 23.

Credit Concentration Risk

Credit concentration risk is the risk arising from an uneven distribution of exposures, through single name, sector or geographical concentration.

The Group analyses the credit concentrations through its daily credit exposure reports and its weekly Credit VaR model report. The Group’s exposures are concentrated on Government bonds and the financial sector.

Liquidity RiskLiquidity risk is the risk that the Group has insufficient resources to meet its obligations as they fall due.

At MUSI, the ultimate responsibility for liquidity risk management sits with the Board which sets the Group’s Liquidity Risk Appetite, being the level of risk the Group chooses to take in pursuit of its strategic objectives. The Board mandate to the Executive Committee in respect of liquidity risk includes specification of liquidity stress testing, approval of business line unsecured funding limits, transfer pricing rates and policy and the Contingency Funding Plan (CFP).

The Executive Committee has determined the powers and discretions delegated to the ALCO which meets monthly or on an ad-hoc basis (as appropriate) to:

• Review and define the funding and liquidity risk policy

• Review compliance with the Group’s liquidity risk appetite

• Oversee and review stress testing

• Measure, monitor and mitigate liquidity risk exposures for MUSI

• Ensure that appropriate business incentives are maintained that reflect the cost and availability of liquidity through the Group’s Fund Transfer Pricing process and unsecured funding limit allocation process

• Determine the funding plan for MUSI in the light of business projections and objectives.


On a day to day basis, liquidity risk is managed using a “three lines of defence” approach; business management by the Treasury Department, challenge and risk control by the Prudential Risk Management Department and assurance provided by Internal Audit.

The principal objective of the Group’s liquidity risk framework is to ensure compliance with the Board approved Liquidity Risk Appetite by determining the amount of liquidity required to meet contractual and contingent liquidity needs in both normal and stressed market conditions. The adequacy of the Group’s liquidity resources is determined through a combination of qualitative and quantitative measures. Further information regarding the current contractual maturity profile of liabilities is reflected in Note 15.

The primary qualitative framework is the “Liquidity Stages” assessment – this is the formal evaluation of both the internal and external environment affecting the Group and the wider MUFG group. The liquidity stage is determined by an evaluation of the availability of funding and is monitored through a combination of early warning indicators, the Group’s internal stress testing and compliance with regulatory liquidity guidelines. Elevation of the liquidity stage is specifically linked to activation of the CFP, which provides a range of mitigating actions to be taken. Such actions are taken following consideration of any relevant market, economic or client impact. In the event the liquidity stage is elevated, formal approval is required from the ALCO, who will in turn escalate and sanction actions as appropriate. Monitoring of the Liquidity Stage is conducted at Company and MUSHD level on an ongoing basis. Any elevation of Liquidity Stage risk at the MUSHD level is deemed to represent a worsening of conditions that would impact the Company too.

The quantitative measures used to monitor the adequacy of the Group’s liquidity resources include the stress testing framework. This captures the implications of a systemic/market and MUSI specific/idiosyncratic stress, separately and combined. The model captures all material drivers of liquidity (both on and off balance sheet) and evaluates the subsequent liquidity outflow in order to determine the size of the liquidity resources required to navigate the stress event. The stressed outflows are based on past experiences of stress market conditions, an extensive study of market practices and regulatory requirements. Stress testing is conducted on both a material and combined currency basis.

MUSI seeks to align its liquidity risk appetite with the strategic objectives of the business through regulating the demand for liquidity through the Balance Sheet projection process and through the Funds Transfer Pricing (FTP) methodology. The Balance Sheet projection process balances the business demands for liquidity with the Group’s ability to source and commit liquidity. Business line requests for liquidity are updated on a regular basis as part of the overall business planning process. Treasury monitors (and charges) utilisation of liquidity by the business lines versus their approved funding limits, on a daily basis. The FTP process ensures that the cost of liquidity is allocated to those business lines driving the Group’s on and off balance sheet liquidity requirements, and is based on the Group’s estimation of the liquidity support required in a stress scenario.

In recognising the dynamic nature of the liquidity risks faced, the Group has enacted a number of policies to mitigate the impact of any potential stress event. The Group’s liquidity resources (comprising the Liquid Asset Buffer mandated by the PRA plus excess cash) are required to be invested in strict accordance with the Board approved investment guidelines and the eligibility criteria of the PRA’s Liquid Asset Buffer guidelines. These are unencumbered, high quality, highly liquid credit insensitive assets which can be monetised instantaneously to meet any potential liquidity requirements. The CFP allows senior management to identify triggers indicative of a stress event, and to initiate the most effective response for stabilising and mitigating liquidity risk exposures through clear operational plans, clearly defined decision making responsibilities and effective communication with both internal and external stakeholders. The CFP also specifies the means through which additional funding should be sourced during a period of heightened liquidity concern.

The Group also maintains Recovery Plans which consider actions to facilitate recovery or an orderly resolution from a severe stress.

The PRA review the liquidity position of the Group and provide Individual Liquidity Guidance (ILG) that establishes a minimum level of buffer assets that the Group is required to hold. The Group has complied with these requirements throughout the period.

Operational Risk Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk.

The Group aims to manage and control its exposure to Operational Risk, and through its policies and procedures, the Group targets to ensure that it:

1. Mitigates the risk of exposure to fraud2. Processes transactions correctly, accurately and on a timely basis3. Protects the integrity and availability of information processing facilities, infrastructure and data4. Maintains the confidentiality of its client information5. Employs appropriate numbers of skilled staff and complies with relevant employment laws and regulations6. Establishes workplace environments that are safe for both employees and visitors7. Reduces both the likelihood of an incident occurring and the impact should an incident occur

The Group employs The Standardised Approach (TSA) for calculating its Pillar I Operational Risk Capital Requirement. The Group is committed to adopting leading industry practices for managing and measuring Operational Risk, and has also developed a scenario based capital model to determine whether it should hold any additional capital for Operational Risk.

Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.

Management of Primary Risk Types (continued) Operational Risk Management FrameworkIn order to facilitate the management of Operational Risk, the firm sub-divides it into the 7 Basel II categories, i.e.:

1. Execution, delivery and process management2. Clients, products and business practices3. Internal fraud risks4. External fraud risks5. Employment practices and workplace safety6. Business disruption and systems failures7. Damage to physical assets

The Operational Risk Management framework is defined within the firm’s policies and detailed standards, and comprises of the following key elements:

• Risk appetite: The Group has defined its Operational Risk Appetite in both quantitative and qualitative terms, reflecting both the financial and non-financial impacts that can arise from operational risk

• Self-Assessments: Managers within the Group assess the effectiveness of their controls at mitigating the key operational risks, relative to the Group’s appetite

• Scenario Analysis: The Group uses Scenario Analysis to assess the risks of extreme but plausible events

• Key Risk & Control Indicators: These metrics are used by the Group to monitor its Operational Risk profile and to alert management when risk levels exceed acceptable ranges

• Incidents & losses: The Group systematically collects details of both operational risk losses (and gains) above a certain threshold and also details of incidents, even if they have not led to loss

• Reporting: Reports are used by the operational risk function and management to understand, monitor, manage and control Operational Risk and losses

• Insurance: As part of its risk management approach, the Group also uses insurance to mitigate the impact of some operational risks

• Training: Staff are required to undertake on-line operational risk awareness training

The firm has a dedicated Operational Risk Management function supported by representatives from the key control and support functions who attend monthly Operational Risk Working Group meetings. Issues of significance are escalated to a senior Operational Controls Committee, which also meets on a monthly basis and is attended by members of senior management and heads of the control functions.

Capital Management and Allocation (unaudited)

The Group’s regulatory capital resources consist of 3 tiers:

Tier 1 – Share capital and audited retained earnings

Tier 2 – Unrecognised profit on available for sale equities, and subordinated debt with original maturity of at least 5 years

Tier 3 – Subordinated debt with original maturity between 2 to 5 years and unaudited profit and loss figure, adjusted for regulatory capital purposes.

The Group manages its risk profile and its capital resources with the objective of maintaining a regulatory ratio in excess of the Capital Resources Requirement for its risk profile at all times. The management of the Group’s capital is carried out under the principle that it should not unexpectedly need to raise new capital or significantly reduce its risk taking in order to meet its capital management objectives.

The Group has fulfilled its objectives at all times during the year. The breakdown of capital as at 31st December is shown below:

During the year, the Group issued new subordinated loans totalling £956.3 million equivalent (JPY 166.0 billion). In addition, there was a concurrent early repayment of loans totalling £643.4 million equivalent (JPY 89.5 billion) and maturity of notes totalling £73.0 million equivalent (JPY 10.0 billion). The new loans carry a 7 year maturity (refer to Note 13) and qualify for inclusion as Tier 2 capital.

Under Basel 2.5, Tier 2 is limited to 50% of Tier 1 therefore the remainder of the Tier 2 eligible subordinated loans are classified under Tier 3. Effective 1 January 2014, the Group will be assessed under Basel 3 which no longer applies this Tier 2 restriction. This will result in the full amount of subordinated debt qualifying for inclusion as Tier 2.

2013 2012For the year ended 31 December Notes £’000 £’000

Interest income 30,672 44,875

Interest expense (21,137) (33,938)

Net interest income 1 9,535 10,937

Dividend income - 18

Fees and commissions income 44,202 42,554

Fees and commissions expense (7,353) (5,097)

Net fees and commissions income 36,849 37,457

Dealing profits 209,862 218,847

Net income from financial instruments designated at fair value - 18

Net income from operations 1 256,246 267,277

Administrative expenses 2 (249,813) (216,951)

Profit on ordinary activities before taxation 6,433 50,326

Taxation on ordinary activities 7 (1,721) (13,338)

Profit on ordinary activities after taxation 4,712 36,988


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Financial StatementsConsolidated profit and loss account

All the above profit is derived from the Company. As permitted by Section 408 of the Companies Act 2006, a separate profit and loss account of the Company is not presented as part of these Financial Statements.

Consolidated statement of total recognised gains and losses

2013 2012For the year ended 31 December Notes £’000 £’000


Available for sale reserve:

Net change in fair value 11,938 41,949

Net amount transferred to the profit and loss account 2,118 (24,699)

Cash flow hedge reserve movement (617) 10,341

Deferred tax recognised directly in equity 7 (3,048) (4,315)

Actuarial loss on defined benefit plans 26 (1,564) (2,847)

Total recognised gains relating to the year 13,539 57,417

2013 2012 £’000 £’000

Total Tier One Capital after Deductions 879,122 844,966

Total Tier Two Capital after Deductions 439,561 36

Total Tier Three Capital 511,359 723,763

Total Capital After Deductions 1,830,042 1,568,765

2013 2012As at 31 December Notes £’000 £’000

ASSETS

Cash at bank 124,067 264,127

Trading assets

Trading securities 8 3,539,959 5,801,341

Reverse repurchase agreements - fair value 27,476,559 19,720,206

Securities sold not delivered 939,761 497,665

Cash collateral on securities borrowed 1,595,574 170,699

Cash collateral paid to derivative counterparties 2,040,492 2,802,129

Derivatives 9 12,365,844 15,298,511

Financial assets designated at fair value 11,512 21,543

Loans and advances to banks - reverse repurchase agreements 1,574,478 1,782,362

Available for sale - securities 1,925,314 2,418,640

Held to maturity - debt securities 679,538 664,743

Fixed assets 10 54,924 49,654

Other assets 11 546,473 121,985

Total assets 52,874,495 49,613,605

LIABILITIES

Deposits by banks repayable on demand 11,984 1

Trading liabilities

Trading securities 8 2,138,177 2,020,579

Repurchase agreements - fair value 27,020,449 20,578,995

Securities bought not delivered 629,150 605,396

Cash collateral on securities lent 35,030 47,363

Cash collateral received from derivative counterparties 4,966,693 4,744,255

Derivatives 9 11,420,957 15,455,226

Financial liabilities designated at fair value 4,230,838 4,315,402

Repurchase agreements at amortised cost 306,607 11,680

Other liabilities 12 251,499 225,041

Subordinated liabilities 13 956,309 716,404

Total liabilities 51,967,693 48,720,342

SHAREHOLDER’S EQUITY

Called up share capital 19 760,611 760,611

Reserves

Cash flow hedging reserve 20 (219) 262

Available for sale reserve 20 (4,599) (15,313)

Profit and loss account 20 151,009 147,703

Total shareholder’s equity 906,802 893,263

Total liabilites and shareholder’s equity 52,874,495 49,613,605


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A separate Company Balance Sheet is not presented as there were no balances attributed to subsidiaries at 31st December 2013 or 31st December 2012.

The financial statements on pages 19 to 54 and business and risk management policies on pages 11 to 18 were approved by the Board of Directors on 14th March 2014 and signed on its behalf by:

David KingInterim CEO

14th March 2014

Consolidated balance sheet

Company Number: 1698498


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Accounting PoliciesThroughout this report, “the Company” is used to refer to Mitsubishi UFJ Securities International plc only; “the Group” is used to refer to the consolidated results of the Company together with its subsidiaries (as identified in note 29).

Basis of preparation of consolidated accountsThe consolidated financial information includes the financial statements of the Company and its subsidiary undertakings for the year ended 31st December 2013. The consolidated financial information has been prepared under the historical cost convention modified by the revaluation to fair value of certain positions, and in accordance with applicable accounting standards (United Kingdom Generally Accepted Accounting Practices) and with the Companies Act 2006. The financial statements have been prepared on a going concern basis due to expected future profitability and continuing support from MUSHD.

The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on page 3. The financial position of the Group, its liquidity position and borrowing facilities are described through the financial statements beginning on page 19. In addition, the Business and Risk Management Policies on pages 11 to 18 include the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and various forms of risk.

The Group has considerable financial resources together with long term support from MUFG, and contracts with both a broad range of customers and financial institutions across different geographic areas. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain global economic outlook. In response to specific risks in the European periphery, a breakdown of exposures to selected countries is provided in note 23. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis in preparing the annual financial statements.

During 2008, the Group adopted an amendment to FRS 26 “Financial Instruments: Measurement” to incorporate changes made by the International Accounting Standards Board (“IASB”) to IAS 39 “Financial Instruments: Recognition and Measurement” which permitted an entity to reclassify non-derivative financial assets out of the held-for-trading category. The financial consequence of the reclassification is that the reclassified assets are no longer marked-to-market through the profit and loss account.

Under FRS 1 Cash flow statements (Revised) the Group is exempt from the requirement to prepare a cash flow statement on the grounds that more than 90% of the voting rights are controlled by the Group’s immediate parent undertaking which includes the Group in its own published financial statements.

Use of estimates and assumptionsThe preparation of financial information requires the use of estimates and assumptions about future conditions. The use of available information and the application of judgement are inherent in the formation of estimates; actual results in the future may differ from estimates upon which financial information is prepared. The Group believes that the critical accounting policies where judgement is necessarily applied are those which relate to the valuation of financial instruments, and recognition of deferred tax assets.

ConsolidationThe acquisition method of accounting has been adopted. Under this method, the subsidiary undertakings acquired or disposed of during the period are included in the consolidated profit and loss account from the date of acquisition or up to the date of disposal.

Subsidiaries are consolidated from the date that MUSI gains control. Entities that are controlled by MUSI are consolidated until the date that control ceases.

In the context of Special Purpose Entities (“SPE”), the following criteria are used to assess if, in substance, MUSI controls an SPE:

• ability to direct the financial and operating policies of the vehicle

• exposure to the risks inherent in the vehicle

• exposure to the benefits arising from the assets of the vehicle

• ability to prevent others from directing the vehicle or accessing the benefit of the vehicle.

A re-assessment of the vehicle is performed whenever there is a change in the substance of the relationship between MUSI and the vehicle.

Page 22 Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.


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Trading assets and trading liabilitiesLong and short positions in debt and equity securities, which have been acquired or incurred principally for the purpose of selling or repurchasing in the near term or which are part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking, are classified as held-for-trading. Such financial assets or financial liabilities are recognised initially at fair value, with transaction costs taken to the profit and loss account, and are subsequently remeasured at fair value. All subsequent gains and losses from changes in the fair value of these assets and liabilities together with related interest income, interest expense and dividends, are recognised in the profit and loss account within dealing profits or losses as they arise. Financial assets and financial liabilities are recognised using trade date accounting.

Held to maturityHeld to maturity (“HTM”) investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group positively intends, and is able, to hold until maturity. HTM investments are initially recorded at fair value plus any directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method, less any impairment. Foreign exchange gains or losses on HTM investments are recognised in net trading income. HTM investments are recognised using trade date accounting.

Any sale or reclassification of a significant amount of HTM investments not close to their maturity would result in the reclassification of all HTM investments to available for sale, and prevent the Group from classifying investment securities as HTM for the current and the following two financial years.

Loans and receivablesLoans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest rate method, less any impairment.

Available for saleAvailable for sale (“AFS”) investments are non-derivative investments that are not designated as another category of financial asset and are carried at fair value.

Interest income is recognised in the profit and loss account using the effective interest method. Dividend income is recognised in the profit and loss account when the Group becomes entitled to the dividend. Foreign exchange gains or losses on AFS debt security investments are recognised in net trading income. Other fair value changes are recognised directly in shareholder’s equity within the AFS reserve until the investment is sold or impaired, at which time the balance in equity is recognised in the profit and loss account.

Financial instruments designated at fair valueFinancial instruments, other than those held for trading, are classified in this category if they meet one or more of the criteria set out below, and are so designated by management. The Group may designate financial instruments at fair value when doing so results in more relevant information due to the following: • It eliminates or significantly reduces valuation or recognition inconsistencies that would otherwise arise from measuring financial assets or financial

liabilities, or recognising gains and losses on them, on different bases. Under this criterion, the main classes of financial instruments designated by the Group are medium term note issues and money market loans and deposits. The return on certain of these instruments has been matched with derivatives. An accounting mismatch would arise if the debt securities and money market transactions were accounted for at amortised cost, because the related derivatives are measured at fair value with movements in the fair value taken through the profit and loss account. By designating these assets and liabilities at fair value, the movement in their fair value will also be recorded in the profit and loss account.

• Groups of financial assets, financial liabilities or combinations thereof are managed and their performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and information about groups of financial instruments is reported to management on that basis. Under this criterion, the main items designated were total rate of return instruments transacted in the subsidiary companies (Asset Finance Corporation Ltd. and TROR Corporation Ltd.). The Group has documented risk management and investment strategies designed to manage such assets and liabilities at fair value.

• Certain financial instruments contain one or more embedded derivatives that significantly modify the cash flows resulting from those financial instruments.

The fair value designation, once made, is irrevocable. Designated financial assets and financial liabilities are recognised on trade date, when the Group enters into contractual arrangements with counterparties. Measurement is initially at fair value with transaction costs taken directly to the profit and loss account. Subsequently, the fair values are re-measured, and gains and losses from changes therein are recognised in the profit and loss account.

Repurchase and resale agreementsSecurities which have been sold subject to an agreement to repurchase remain on the balance sheet and a liability based on the net present value of the associated future cash out flows is recorded within liabilities. Securities acquired in purchase and resale transactions are not recognised on the balance sheet and an asset based on the net present value of the associated future cash receipts is recorded within assets.

Transactions which are managed by the Treasury business are recorded as loans and receivables (reverse repurchase agreements) or liabilities at amortised cost (repurchase agreements). As such, the balances recorded in assets and liabilities are subsequently remeasured only to reflect the accrual of interest or impairment.

All other sale and repurchase and reverse repurchase agreements are treated as trading instruments. As such, the balances recorded in assets and liabilities are subsequently remeasured at fair value. Gains and losses from changes in the fair value of the associated cash flows are recognised in the profit and loss account as they arise. Assets and liabilities are offset and the net amount reported on the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis.

Financial liabilitiesFinancial liabilities are measured at amortised cost, except for trading liabilities and liabilities designated at fair value, which are held at fair value through profit and loss.

Identification and measurement of impairmentAt each balance sheet date the Group assesses whether there is objective evidence that financial assets not carried at fair value through the profit and loss account are impaired. Financial assets are impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the asset, and that the loss event has an impact on the expected future cash flows of the asset that can be estimated reliably. Examples of such events would include significant credit deterioration of the issuer such as a significant credit rating downgrade; default, delinquency or bankruptcy of the issuer; or another specific event which would lead to a decrease in expected future cash flows.

Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of estimated future cash flows, discounted at the assets’ original effective interest rate. Losses are recognised in the profit and loss account and reflected in an allowance against the carrying value of the assets. Interest on the impaired asset continues to be recognised through the unwinding of the discount.

When a subsequent event, for example, reversal of one of the conditions outlined above, causes the amount of impairment loss to decrease, the impairment loss is reversed through the profit and loss account.

Impairment losses on AFS investment securities are recognised by transferring the difference between the amortised acquisition cost and current fair value out of equity to the profit and loss account. When a subsequent event causes the amount of impairment loss on an AFS debt security to decrease, the decrease in impairment loss is reversed through the profit and loss account. Impairment losses on AFS equity securities are not reversed through the profit and loss account.

DerivativesDerivatives are recognised initially, and are subsequently remeasured, at fair value. All changes in fair value, except for certain gains and losses related to cash flow hedges, are recognised in the profit and loss account within net trading income as they arise. Fair values are obtained from quoted market prices in active markets, or using valuation techniques where an active market does not exist. Valuation techniques include discounted cash flow models, recent market transactions and option pricing models as appropriate. All derivatives are classified as assets when their fair value is positive or as liabilities when their fair value is negative. Derivatives are recognised using trade date accounting.

Financial assets and liabilities are offset and the net amount reported on the balance sheet if, and only if, the entity currently has a legally enforceable right of offset and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously. In many cases, even though master netting agreements are in place, the related assets and liabilities are presented gross on the balance sheet as these requirements are not met.

The counterparty risk on certain derivative transactions is hedged through a financial guarantee provided by a fellow MUFG subsidiary which provides indemnities in the event of default by the derivative counterparties. The valuation of the derivative transactions with these counterparties reflects the fact that the credit risk is guaranteed. The financial guarantee is accounted for as a guarantee.


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CollateralCash collateral pledged by the Group on derivative and other liabilities is classified as an asset within loans and receivables. Cash collateral pledged by counterparties is classified within financial liabilities at amortised cost. These balances are initially measured at fair value and subsequently measured at amortised cost.

Where securities are posted to counterparties as collateral against liabilities of the Group the security will be retained on the Group’s balance sheet and will not impact the recorded liability. Collateral received in the form of securities is not recorded on the balance sheet.

Embedded derivativesDerivatives may be embedded in other contractual arrangements. Embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host; the terms of the embedded derivatives would meet the definition of a stand-alone derivative if they were contained in a separate contract; and the combined contract is not held for trading or designated at fair value. These embedded derivatives are measured at fair value with changes in fair value recognised in the profit and loss account.

Hedge accountingAt the inception of a hedging relationship, the Group documents the relationship between the hedging instruments and the hedged items, its risk management objective and its strategy for undertaking the hedge. The Group also requires a documented assessment, both at hedge inception and on an ongoing basis (both prospective and retrospective effectiveness), of whether or not the hedging instruments are highly effective in offsetting the changes in the fair values of the hedged items attributable to the hedged risks. Hedges are designated by the Group as either: hedges of the change in fair value of recognised assets or liabilities (‘fair value hedges’) or hedges of the variability of cash flows attributable to a recognised asset or liability or a forecast transaction (‘cash flow hedges’).

Fair value hedgesChanges in the fair value of derivatives that are designated, and qualify, as fair value hedging instruments are recorded in the profit and loss account, along with changes in the fair value of the hedged assets, liabilities or groups thereof that are attributable to the hedged risk. If a hedging relationship no longer meets the criteria for hedge accounting, the cumulative adjustment to the carrying amount of the hedged item is amortised to the profit and loss account based on a recalculated effective interest rate over the residual period to maturity, unless the hedged item has been derecognised, in which case, it is released to the profit and loss account immediately.

Cash flow hedgesThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in shareholder’s equity within the cash flow hedging reserve. Any gain or loss in fair value relating to an ineffective portion is recognised immediately in the profit and loss account. Amounts accumulated in equity are recycled to the profit and loss account in the periods in which the hedged item will affect profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity until the forecast transaction is eventually recognised in the profit and loss account. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the profit and loss account.

De-recognition of financial assets and liabilitiesFinancial assets are derecognised when the rights to receive cash flows from the assets have expired; or when the Group has transferred both its contractual right to receive the cash flows of the financial assets, and substantially all the risks and rewards of ownership; or where control is not retained. Financial liabilities are derecognised when they are extinguished, that is when the obligation is discharged, cancelled or expires.

Fair value measurement of financial assets and liabilitiesFair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction on the measurement date.

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm’s length basis.

If the market for a financial instrument is not active, the Group establishes fair value using valuation techniques. Valuation techniques include using recent arm’s length transactions between knowledgeable, willing parties (if available), reference to the current fair value of other instruments that are substantially the same, discounted cash flow analysis and option pricing models. The chosen valuation technique makes maximum use of market inputs, relies as little as possible on estimates specific to the Group, incorporates all factors that market participants would consider in setting a price, and is consistent with accepted economic methodologies for pricing financial instruments. Inputs to valuation techniques reasonably represent market expectations and measures of the risk-return factors inherent in the financial instrument. The Group calibrates valuation techniques and tests them for validity using prices from observable current market transactions in the same instrument or based on other available observable market data.

When unobservable market data have a significant impact on the valuation of financial instruments and the model valuations indicate initial profits on the transaction, the entire initial gain is not recognised immediately in the profit and loss account. The initial gain is measured as the difference in fair value indicated by the valuation model price and the transaction price. These gains are deferred and recognised over the life of the transaction on a systematic basis, or when the inputs become observable, or the transaction matures or is closed out, or when the Group enters into an offsetting transaction. Refer to notes 14 and 15 for further detail on the fair value of financial instruments.

Management fees and commissionManagement fees and commission are recognised in the period during which the management service has been provided.

Client Money segregationThe Group holds money on behalf of some clients in accordance with the Client Money Rules of the Financial Conduct Authority. Such monies and the corresponding amounts due to clients are not shown on the face of the balance sheet as the clients retain beneficial ownership.

Net interest incomeThe interest balances presented within the consolidated profit and loss account represent the returns and costs to the firm of holding regulatory buffer assets and long term investment positions. These positions are held and managed within the Treasury function. Interest income represents coupon income and amortisation of any premium or discount arising upon purchase of HTM or AFS investments and certain reverse repurchase agreements treated as loans and receivables. Interest expense represents the cost of funding these positions and includes the cost of repurchase agreements held as liabilities at amortised cost, interest payable on subordinated debt, and interest costs on other sources of funds that support these investments.

Any coupon receivable or payable on items which are part of the trading activities of the Group are included directly within Dealing profits.

Foreign currenciesThe consolidated financial statements are presented in pounds sterling which is the presentation and functional currency of the Group and Company.

Monetary assets and liabilities denominated in foreign currencies and open forward foreign exchange contracts are translated using the rate of exchange prevailing at the balance sheet date. Gains or losses on translation are included in the profit and loss account.

The assets and liabilities of the Company and its subsidiaries recognised in foreign currencies are translated to the Group’s functional currency at the exchange rates of the reporting date. The income and expenses of the Company’s branches and subsidiaries are translated to the Group’s functional currency at the exchange rates at the dates of the transactions.


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Property and EquipmentProperty and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses.

Expenditure to bring purchased software into operational use and internally developed software is recognised as an asset when the Group considers that the software will be used in a manner that will generate future economic benefits and can reliably measure the costs of development.

All fixed assets are reviewed for impairment on an annual basis. Assets are impaired where it is considered that the future economic benefit of the asset is lower than its carrying amount. Such impairment losses are included directly in the profit and loss account.

DepreciationDepreciation is provided to write off the cost less estimated residual value of fixed assets by equal instalments over their estimated useful economic lives as follows:

Leasehold improvements 10 – 25 years or over the remaining terms of the leases

Office furniture and fittings 5 years

Office machinery and equipment 3 – 5 years

Software 3 – 7 years

Finance and operating leasesAssets held under finance leases are capitalised and included in fixed assets and the corresponding liability to the lessor is included in other liabilities. Finance charges payable are recognised over the periods of the leases, based on the interest rates implicit in the leases. Rentals payable under operating leases are accounted for on a straight-line basis over the periods of the leases and are included in administrative expenses.

TaxationTaxation comprises current and deferred tax. Current tax and deferred tax are recognised in the profit and loss account except to the extent that they relate to items recognised directly in equity.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of all timing differences that have originated but not reversed by the balance sheet date. Timing differences are divergences between the Group’s results for tax purposes and its results as stated in the financial statements that arise from the inclusion of income and expenses in tax assessments in periods different from those in which they are recognised in financial statements. Timing differences are taken into account if they have originated prior to the balance sheet date and are expected to reverse in one or more future periods.

Deferred tax is calculated at the tax rates that are expected to be applied to timing differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities against current tax assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend to settle current tax liabilities and assets on a net basis.

A deferred tax asset is recognised for unused tax losses and other deductible timing differences to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised.

Deferred tax balances are not discounted.

Employee BenefitsStaff are remunerated through both salary and annual performance based “discretionary” compensation awards. Performance based awards are calculated annually, and reflect the performance of both the individual and the Group during that annual period. Portions of performance based awards are paid by the Group on deferred terms. From 2011 onwards, a portion of these deferred awards for certain employees subject to the PRA’s Remuneration Code are linked to the performance of the share price of MUFG. These awards are termed NSU’s.

Where payments are made on a deferred basis and the cash value is fixed at the award date, the Group recognises the costs of the deferred awards during the period that the award is made, even though cash payments will not be made until future periods. The Group considers that this treatment most effectively represents the costs of employee compensation for the period.

Where payments are made on a deferred basis and the cash value is linked to the share price, the Group amortises the expected cost of the award across the entire deferral period, and records as an expense only that portion which is deemed to have accrued during the current period.

PensionsThe Group maintains both a defined contribution pension scheme and a defined benefit pension scheme (the defined benefit scheme is closed to new entrants and to future accruals).

For the defined contribution scheme, pension costs are charged to the profit and loss account which represent the contributions payable to the scheme in respect of the accounting period. For the defined benefit scheme, pension scheme assets are measured using market value. Pension scheme liabilities are measured using a projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. The increase in the present value of the liabilities of the Group’s defined benefit pension scheme expected to arise from employee service in the period is charged to Profit on ordinary activities before taxation. The expected return on the scheme’s assets and the increase during the period in the present value of the scheme’s liabilities arising from the passage of time are included in administrative expenses. Actuarial gains and losses are recognised in the statement of total recognised gains and losses. Deficits in the scheme are recognised in the Group’s balance sheet. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes.

The Group recognises the effect of material changes to the terms of its defined benefit pension scheme which reduce future benefits as curtailments; gains and losses are recognised in the profit and loss account when the curtailments occur.

The Group revalues its defined benefit scheme at 30th June and 31st December each year, in consultation with the scheme’s actuaries. The assumptions underlying the calculations are used to determine the expected profit and loss charge for the year going forward.


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Notes on Financial Statements1 Net income from operations

The whole of the income from operations and profit/(loss) on ordinary activities is derived from substantially the same class of business and in a market which is not delineated by geographical bands for internal management reporting.

• Net interest income represents the returns and costs to the Group of holding regulatory buffer assets and long term investment positions.

• Net fee and commission income is income earned by the Group mainly from debt underwriting, equity underwriting, operational and consultancy services provided.

• Dealing profits comprises all gains and losses from changes in the fair value of financial assets and financial liabilities held for trading, together with related interest income, expenses and dividends. Included in dealing profits are gains and losses from notes issued containing one or more embedded derivative as these are economically hedged by other derivative instruments.

• Net income from financial instruments designated at fair value includes all profits and losses from changes in the fair value of financial assets and financial liabilities designated at fair value through profit and loss except for the notes issued, mentioned above. Interest income and expenses arising on these financial instruments are also included.

Group and Company

2013 2012 £’000 £’000

Interest income

Available for sale - securities 27,472 28,839

Held to maturity - debt securities 3,200 16,036

Total interest income 30,672 44,875

Interest expense

Cost of funding Available for sale - securities (18,930) (19,345)

Cost of funding Held to maturity - debt securities (2,207) (14,593)

Total interest expense (21,137) (33,938)

Net interest income 9,535 10,937

Due to the integrated nature of the Company’s business, it is not meaningful to provide an analysis of the total assets by geographical split or segment.

The net income from operations in the profit and loss account for the year can be analysed into the following business areas:

Group and Company

2013 2012 £’000 £’000

Fixed income 188,651 223,267

Equity 16,510 9,410

Structured products 47,350 31,193

Commodities 3,735 3,407

Net income from operations 256,246 267,277

Page 30 Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.


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2 Administrative expenses

3 Staff costs

Group and Company

2013 2012 £’000 £’000

Staff costs (Note 3) 140,833 125,932

Depreciation of fixed assets 12,108 9,581

Operating lease rental - premises 1,125 1,220

Quotation and communication equipment 9,350 7,235

Auditor’s remuneration (Note 6) 1,301 568

Other administrative expense 85,096 72,415

Total administrative expense 249,813 216,951

Other administrative expense increase is driven by cost reimbursements across the MUSHD International securities business including entities in the United States and Asia totalling £43.1m (2012: £26.9m).

During 2012 there was a change in the accounting treatment related to the recognition of deferred compensation costs where the value of the award is linked to the share price of MUFG (see accounting policies).

The average headcount and staff costs do not include any staff attributable to entities in the United States and Asia.

The number of directors who were members of the Group defined contribution personal pension plan during the period was 3 (2012: 3).

Deferred cash compensation expense is recognised during the period the award is made.

NSUs are cash settled awards linked to the share price of the ultimate holding company, MUFG. Deferred NSU compensation expense is pro-rated across the entire deferral period, in line with the change in accounting treatment adopted during 2012.

The services of certain directors are provided and remunerated through other companies within MUFG.

Group and Company

2013 2012

Average number of employees 590 570

2013 2012 £’000 £’000

Wages and salaries 119,475 105,186

Social security costs 15,558 15,651

Pension costs 5,800 5,095

Total staff costs 140,833 125,932

4 Directors’ emoluments Group and Company

2013 2012 £’000 £’000

Emoluments (excluding pension contribution) 2,432 2,843

Deferred compensation - Cash 440 593

- NSUs 1,098 989

Company payment to defined contribution pension scheme for directors 44 40

Total directors’ emoluments 4,014 4,465

Group and Company

2013 2012 £’000 £’000

Emoluments (excluding pension contribution) 681 753

Deferred compensation - Cash 417 593

- NSUs 1,024 989

Pension 17 16

Total emoluments 2,139 2,351

There were no outstanding loans due from Directors as at 31st December 2013 or 31st December 2012.

5 Share based payments

Notional Stock Units

The Company awarded NSUs to a number of employees during the year. The NSUs are deferred over a period of 3 years and track the performance of MUFG shares (see accounting policies).

Group and Company

2013 2012

No. of units Value No of units Value (’000) (’000)

No. of NSUs outstanding as at 1st January 3,272 2,399

Granted during the year:

No. of NSUs granted 1,611 1,892

Value in GBP ‘000 equivalent at grant date 5,835 6,810

Less:

No. of NSUs vested during the year (1,198) (1,008)

Average share price at vesting / payment (JPY) 603 371

No. of NSUs forfeited / cancelled (unvested) (132) (11)

No. of NSUs as at 31st December 3,553 3,272

Fair Value of outstanding NSUs at 31st December (GBP ‘000) 15,876 12,083

4 Directors’ emoluments (continued)The emoluments of the highest paid director were as follows:


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6 Auditor’s remuneration Group and Company

2013 2012 £’000 £’000

Fees payable to the Group’s auditor for services to the Group:

Statutory audit fees 399 360

Audit related assurance services 76 76

Other taxation advisory services 54 10

Other assurance services 676 73

Services relating to corporate finance 80 33

1,285 552

Fees payable to the Group’s auditor for services to the Group’s defined benefit pension scheme:

Statutory audit fees 16 16

Total auditor’s remuneration 1,301 568

7 Taxation The tax figure is based on the result for the year and comprises:

Group and Company

2013 2012 £’000 £’000

UK corporation tax

Current tax on profit on ordinary activities for the year (141) (791)

Adjustments in respect of previous years 28 -

(113) (791)

Foreign tax on income for the year (913) (1,229)

Total current tax (1,026) (2,020)

Deferred tax

Origination and reversal of timing differences (1,169) (11,563)

Effect of decreased tax rate (1,370) (1,276)

Adjustments in respect of previous years 1,844 1,521

Total deferred tax (695) (11,318)

Total taxation on profit on ordinary activities (1,721) (13,338)

Reconciliation of effective tax rate

Group and Company

2013 2012 £’000 £’000

Profit on ordinary activities before taxation 6,433 50,326

Tax charge on ordinary activities at average standard UK corporation tax rate

of 23.25% (2012: 24.5%) (1,496) (12,330)

Permanent differences (37) (324)

Depreciation less than capital allowances claimed 235 742

Other timing differences (1,590) (330)

Utilisation of tax losses 2,534 11,150

Unrelieved foreign tax (700) (928)

Current tax prior year adjustment 28 -

(1,026) (2,020)

Tax recognised in equity

Group and Company

2013 2012 £’000 £’000

Tax Tax (expense) (expense) Before tax /benefit Net of tax Before tax /benefit Net of tax

Available for sale securities 14,056 (3,342) 10,714 17,250 (4,711) 12,539

Cash flow hedges (617) 136 (481) 10,341 (78) 10,263

Actuarial loss on pension (1,564) 158 (1,406) (2,847) 474 (2,373)

11,875 (3,048) 8,827 24,744 (4,315) 20,429

Deferred tax asset

Group and Company

2013 2012 £’000 £’000

Balance at 1st January 19,202 34,835

Charge to the profit and loss account for the year (695) (11,318)

Charge to the statement of total recognised gains and losses for the year (3,048) (4,315)

Balance at 31st December 15,459 19,202

Deferred tax assets reflect the tax benefits which are expected to arise in the future from the utilisation of tax losses and other timing differences. The deferred tax assets disclosed above will reverse as follows:

• Depreciation in excess of capital allowances: as the underlying fixed assets are depreciated through the profit and loss account (see fixed asset depreciation policies)

• Deferred bonus payments: over a rolling four year period as deferred compensation is paid out to serving staff

• Carried forward tax losses: as the Group earns further profits. It is anticipated that this period will not exceed two years

• Available for sale securities: either over the lives of the underlying securities, as the securities are sold, or as the Group earns further profits. It is anticipated this period will not exceed two years

• Pension scheme: as the Group pays contributions to the scheme.

The Finance Act 2013 introduced a reduction in the UK corporation tax rate to 21% with effect from 1 April 2014, and a further reduction to 20% with effect from 1 April 2015. As these rates were enacted by the balance sheet date they have been taken into account when valuing the Group’s deferred tax assets, dependant on when the relevant timing difference is expected to reverse.

The difference between the total current tax and the amount calculated by applying the average standard rate of UK corporation tax for the period to the profit on ordinary activities before taxation is as follows:

Recognised deferred tax assets

Deferred tax assets are attributable to the following:

Group and Company

2013 2012 £’000 £’000

Assets Assets

Depreciation in excess of capital allowances 1,792 2,021

Deferred bonus payments and other timing differences 9,328 9,523

Tax losses carried forward 2,890 1,933

Available for sale securities 1,449 4,585

Pension deficit - 1,140

Deferred tax assets 15,459 19,202

7 Taxation (continued)

Group and Company

Office Office Leasehold furniture & machinery & improvements fittings equipment Software Total £’000 £’000 £’000 £’000 £’000

Cost

At 1st January 2013 16,795 1,413 15,197 65,534 98,939

Additions 68 26 1,612 15,672 17,378

Disposals - - (368) (2,795) (3,163)

At 31st December 2013 16,863 1,439 16,441 78,411 113,154

Depreciation

At 1st January 2013 1,881 573 8,760 38,071 49,285

Charge for the year 968 283 3,327 7,530 12,108

Disposals - - (368) (2,795) (3,163)

At 31st December 2013 2,849 856 11,719 42,806 58,230

Net book value at 31st December 2012 14,914 840 6,437 27,463 49,654

Net book value at 31st December 2013 14,014 583 4,722 35,605 54,924


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8 Trading securities Group and Company

2013 2012 £’000 £’000

Listed Unlisted Total Listed Unlisted Total

Trading securities at market value - Assets 3,094,327 445,632 3,539,959 5,158,796 642,545 5,801,341

Trading securities at market value - Liabilities (1,817,166) (321,011) (2,138,177) (1,709,996) (310,583) (2,020,579)

9 Derivatives

10 Fixed assets

Group and Company

2013 2012 £’000 £’000

Notional Fair value Notional Fair value

Assets

Interest rate contracts 521,012,079 7,900,795 1,286,710,652 11,385,677

Foreign exchange contracts 55,234,608 4,133,533 52,196,355 3,528,860

Equity contracts 1,017,147 12,950 518,641 14,431

Commodities contracts 5,914,952 233,819 2,723,853 282,199

Credit derivative contracts 4,613,442 84,747 4,862,372 87,344

587,792,228 12,365,844 1,347,011,873 15,298,511

Liabilities

Interest rate contracts 1,554,481,931 7,300,135 834,403,236 11,050,893

Foreign exchange contracts 63,532,336 3,823,055 58,154,965 4,032,264

Equity contracts 1,013,056 39,400 1,427,131 81,939

Commodities contracts 4,995,736 172,201 8,099,369 197,684

Credit derivative contracts 4,092,277 86,166 4,178,187 92,446

1,628,115,336 11,420,957 906,262,888 15,455,226

Group and Company

2013 2012 £’000 £’000

Equity finance assets 291,988 -

Other debtors - amortised cost 232,872 97,885

Prepayments and accrued income 6,154 4,898

Deferred tax assets 15,459 19,202

546,473 121,985

11 Other assets

Equity finance assets represent funding to clients, collateralised by equities, which matures 1-3 years from the date of this report. The increase in other debtors is driven by margin deposits and default fund contributions at clearing houses.

12 Other liabilities Group and Company

2013 2012 £’000 £’000

Other creditors 236,792 206,793

Tax and social security 14,707 13,292

Pension liability - 4,956

251,499 225,041

13 Subordinated liabilities Group and Company

2013 2012 Maturity £’000 £’000

Floating rate loans

JPY 39.5 billion at 6 month JPY-LIBOR plus 55bps 21 December 2013 - 283,976

JPY 50.0 billion at 6 month JPY-LIBOR plus 60bps 21 December 2014 - 359,469

JPY 59.5 billion at 6 month JPY-LIBOR plus 90bps 29 June 2020 342,776 -

JPY 106.5 billion at 6 month JPY-LIBOR plus 80bps 27 December 2020 613,533 -

956,309 643,445

Floating rate notes

JPY 2.4 billion at 6month JPY-LIBOR plus 45bps 18 February 2013 - 17,503

JPY 1.0 billion at 6month JPY-LIBOR plus 45bps 25 February 2013 - 7,291

24,794

Fixed rate notes

JPY 4.2 billion at 0.97625% 18 February 2013 - 30,655

JPY 1.2 billion at 0.98125% 25 February 2013 - 8,757

JPY 1.2 billion at 0.98625% 12 March 2013 - 8,753

- 48,165

Total subordinated liabilities 956,309 716,404

Subordinated loans are agreed between the Company and its immediate parent, MUSHD. The above table evidences the issuance of new loans and the early repayment of other loans outstanding (refer to the Strategic Report page 3). All other subordinated liabilities were held by investors external to MUFG.

The interest cost relating to subordinated liabilities incurred during the period was £5.5 million (2012: £4.0 million).


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14 Fair value of financial assets and liabilities

The majority of the Group and Company’s assets and liabilities are carried on the balance sheet at fair value, in which cases fair value is equal to the carrying value.

The following table presents a comparison by category of book amounts and fair value of the Group and Company’s financial assets and liabilities for those items which are not carried at fair value on the balance sheet.

Group and Company

2013 2012 £’000 £’000

Carrying value Fair value Carrying value Fair value

Assets

Held to maturity securities 679,538 673,292 664,743 640,501

Loans and receivables

Reverse repurchase agreements 1,574,478 1,574,468 1,782,362 1,782,357

Cash collateral paid to derivative counterparties 2,040,492 2,040,492 2,802,129 2,802,129

Other debtors 232,872 232,872 97,885 97,885

Accrued income 234 234 294 294

Liabilities

At amortised cost

Repurchase agreements 306,607 306,607 11,680 11,680

Cash collateral paid received from

derivative counterparties 4,966,693 4,966,693 4,744,255 4,744,255

Other creditors 236,792 236,792 206,793 206,793

Subordinated liabilities 956,309 956,094 716,404 721,356

Valuation of financial assets and liabilities

The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

• Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.

• Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data.

• Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

Issued structured notes and certain other hybrid instrument liabilities are designated at fair value. The spread applied to these instruments is derived from the spreads at which the Group issues structured notes. The change in fair value due to credit risk on these instruments is not significant (2012: not significant).

The fair value of certain financial instruments is measured using valuation techniques that are determined in full or part on assumptions that are not supported by observable market prices. The effect of changing these assumptions to a range of reasonably possible alternative assumptions would provide a range from £9.9 million (2012: £15.6 million) lower to £9.5 million (2012: £12.3 million) higher than the fair value recognised in the financial statements for these assets and liabilities. It should be noted that for financial instruments whose valuations are not supported by observable market prices, profits are reserved at inception and these have not been adjusted in making this calculation.

Valuation techniques incorporate assumptions about factors that other market participants would use in their valuations, including interest rate yield curves, exchange rates, volatilities and prepayment and default rates. As a result of evolving market practice in the pricing of derivative contracts, the Group has initiated the use of a discounting curve that reflects the cost of funding transactions which is a function of counterparty specific collateral arrangements. For strongly collateralised derivative positions the appropriate discount curve reflects a risk free valuation using Overnight Indexed Swap (“OIS”) rates adjusted for currency basis. At year end, collateral cost adjusted discount curves were applied to vanilla swap contracts with the remainder of the derivatives portfolio using a discount curve referencing the London Interbank Offered Rate (“LIBOR”). A firm-wide valuation adjustment was booked to reflect the expected impact on completion of the move to collateral cost adjusted valuations.

There were no re-categorisations of financial instruments between levels 1 and 2 of the fair value hierarchy during the period. The movements in balances of level 3 items are detailed on page 40.

Group and Company

2013 £’000

Level 1 Level 2 Level 3 Total

Assets

Trading securities 1,541,790 1,998,169 - 3,539,959

Reverse repurchase agreements - fair value - 27,417,001 59,558 27,476,559

Cash collateral on securities borrowed - 1,595,574 - 1,595,574

Available for sale - securities 1,622,951 302,363 - 1,925,314

Derivatives 3,903 12,259,104 102,837 12,365,844

Financial assets designated at fair value - 11,512 - 11,512

Other assets - equity finance assets - 291,988 - 291,988

3,168,644 43,875,711 162,395 47,206,750

Liabilities

Trading securities 1,985,118 153,059 - 2,138,177

Repurchase agreements - fair value - 27,020,449 - 27,020,449

Cash collateral on securities lent - 35,030 - 35,030

Derivatives 35,851 11,198,165 186,941 11,420,957

Financial liabilities designated at fair value - 3,593,374 637,464 4,230,838

2,020,969 42,000,077 824,405 44,845,451

Group and Company

2012 £’000

Level 1 Level 2 Level 3 Total

Assets

Trading securities 3,506,856 2,294,485 - 5,801,341

Reverse repurchase agreements - fair value - 19,720,206 - 19,720,206

Cash collateral on securities borrowed - 170,699 - 170,699

Available for sale - securities 2,000,616 418,024 - 2,418,640

Derivatives 213 15,211,544 86,754 15,298,511

Financial assets designated at fair value - 21,543 - 21,543

5,507,685 37,836,501 86,754 43,430,940

Liabilities

Trading securities 1,933,219 87,360 - 2,020,579

Repurchase agreements - fair value - 20,578,995 - 20,578,995

Cash collateral on securities lent - 47,363 - 47,363

Derivatives 15,533 14,982,990 456,703 15,455,226

Financial liabilities designated at fair value - 3,313,516 1,001,886 4,315,402

1,948,752 39,010,224 1,458,589 42,417,565

14 Fair value of financial assets and liabilities (continued)


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The table below shows a reconciliation from the beginning balances to the ending balances for the fair value of instruments in level 3 of the fair value hierarchy. This does not include movements in level 2 derivatives that are also used to hedge the level 3 assets and liabilities.

Financial instruments valued using models with unobservable inputs

The amount that has yet to be recognised in the Group profit and loss account relating to the difference between the fair value at initial recognition (the transaction price) and the amount that would have arisen had valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is as follows:

Group and Company

2013 2012 £’000 £’000

Unamortised balance at 1st January 3,755 7,761

Deferral on new transactions 4,281 2,500

Amortised to the proft and loss account during the financial year (3,203) (6,506)

Unamortised balance at 31st December 4,833 3,755

Financial assets designated at fair value

As at 31st December 2013 the maximum exposure to credit risk on financial assets designated at fair value through profit and loss for the Group was £11.5 million (2012: £21.5 million). The Group manages its credit risks in accordance with credit policies which are endorsed by MUSHD. Counterparty exposure is managed through a process of limit setting and exception reporting with credit policy determining the maximum exposure on both a Group and Company basis. The impact of counterparty credit valuation on these instruments was considered not material in both 2013 and 2012.

The Group does not have any credit derivatives hedging these exposures.

Group and Company

2013 £’000

Assets Liabilities

Reverse Financial repurchase liabilities agreements designated Derivatives - fair value Derivatives at fair value

Opening balance 86,754 - (456,703) (1,001,886)

Total gains/(losses) in profit and loss 33,112 773 238,824 (75,503)

Purchases - 58,785 - -

Issues - - - (1,836)

Settlements (17,029) - 30,938 127,117

Transfers into level 3 - - - (447)

Transfers from level 3 - - - 315,091

Closing balance 102,837 59,558 (186,941) (637,464)

- Net trading income 58,504 773 178,163 (72,925)

Unrealised gains or (losses) for the year included in profit and loss for assets and liabilities held at the end of financial year:

Purchases into level 3 are made up of a single reverse repurchase agreement. This trade was executed with an interbank counterparty and collateralised by government bonds. The transaction has been classified as level 3 due to its extended tenor relative to normal terms and conditions (3 years) and the lack of liquidity in the local repo market of the counterparty.

Transfers from level 3 represent selected structured notes which have been reclassified into level 2 of the hierarchy. These structures contain exotic embedded derivatives, primarily linked to credit or foreign exchange rates which drive the returns and valuation of the notes. During the period, there has been an increase in the observability of the key inputs to the valuation models and a corresponding decrease in the significance of the unobservable valuation inputs.

14 Fair value of financial assets and liabilities (continued) 14 Fair value of financial assets and liabilities (continued)


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15 Contractual maturity analysis of financial liabilitiesThe breakdown of financial liabilities by contractual maturity, which is based on the contractual terms, is shown in the table below. The balances do not agree directly to the balances in the balance sheet as the table incorporates contractual cash flows on an undiscounted basis. The repurchase agreement balances are presented on a gross basis, not taking account of any balances which have been offset in the balance sheet. Derivative contracts are reflected as on demand at their fair value as liquidity risk on these items is not managed on a contractual maturity basis. The subordinated liabilities bear interest at variable rates which are not known until specified fixing dates have occurred. As such, periodic interest payments have not been included in the table.

Maturity analysis of financial liabilities

Group and Company

2013 £’000

Due Due Due between between between Due within 3 and 12 1 and 2 2 and 5 Over 5 On demand 3 months months years years years Total

Deposits by banks repayable on demand 11,984 - - - - - 11,984

Trading Securities 2,138,177 - - - - - 2,138,177

Repurchase agreements - fair value 2,203,100 30,470,888 3,274,580 812 - - 35,949,380

Cash collateral on securities lent 34,737 - - - - - 34,737

Cash collateral receivedfrom derivatives counterparties 4,966,693 - - - - - 4,966,693

Derivatives 11,420,957 - - - - - 11,420,957

Financial liabilities designated at fair value - 25,046 355,205 296,258 1,213,041 2,515,503 4,405,053

Repurchase agreementsat amortised cost - 411,704 - - - - 411,704

Other liabilities 164,226 42,776 11,668 19,270 13,559 - 251,499

Subordinated liabilities - - - - - 956,199 956,199

20,939,874 30,950,414 3,641,453 316,340 1,226,600 3,471,702 60,546,383

Group and Company

2012 £’000

Due Due Due between between between Due within 3 and 12 1 and 2 2 and 5 Over 5 On demand 3 months months years years years Total

Deposits by banks repayable on demand 1 - - - - - 1

Trading Securities 2,020,579 - - - - - 2,020,579

Repurchase agreements - fair value 2,609,997 23,924,139 1,564,658 - - - 28,098,794

Cash collateral on securities lent 47,033 - - - - - 47,033

Cash collateral receivedfrom derivative counterparties 4,744,255 - - - - - 4,744,255

Derivatives 15,455,226 - - - - - 15,455,226

Financial liabilities designated at fair value - 336,005 214,821 230,289 781,369 3,367,134 4,929,618

Repurchase agreementsat amortised cost 11,364 81,011 - - - - 92,375

Other liabilities 149,446 48,044 4,916 12,061 10,574 - 225,041

Subordinated liabilities - 71,876 283,910 359,380 - - 715,166

25,037,901 24,461,075 2,068,305 601,730 791,943 3,367,134 56,328,088

The Group and Company hold liquid assets comprising cash and cash equivalents and investment securities for which there is an active and liquid market. These assets can be readily sold to meet liquidity requirements. Financial liabilities designated at fair value include certain note issuances with structured payment profiles. The notes are issued across a range of currencies and interest rate profiles, with the most prevalent being JPY floating rate notes. The Group and Company issue these notes to raise term funding and satisfy investor demand, and carry them at fair value through profit and loss. Some of the notes may be redeemed prior to maturity subject to certain knock-out events, at the option of the issuer or holder of the debt. The structured return profiles include securities which pay coupon only where certain conditions relating to equity performance, foreign currency movements, or other factors are met. These factors are contractually specified at the point of issuance.

15 Contractual maturity analysis of financial liabilities (continued)


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16 Reclassification of financial instruments

17 Fair value hedges

The 2008 amendment to FRS 26 permits entities to reclassify certain financial assets, including: non-derivative held for trading financial assets (other than those designed at fair value through profit by the entity upon initial recognition) out of the fair value through profit or loss category in rare circumstances; and certain financial assets to the loans and receivable category (if the financial asset had not been designated as available for sale) if the entity had the intention and ability to hold that financial asset for the foreseeable future. As a result of this amendment, the Company reclassified some of its government inflation linked bond holdings from trading to either held to maturity or available for sale categories in 2008.

No further reclassifications have been carried out since adoption of this amendment during 2008.

Group and Company

2013 2012 £’000 £’000

Carrying value Fair value Carrying value Fair value

Securities reclassified to AFS 835,145 835,145 1,000,616 1,000,616

Securities reclassified to HTM 679,538 673,292 664,743 640,501

Total 1,514,683 1,508,437 1,665,359 1,641,117

Effects on the profit and loss account (excluding FX impact)

Group and Company

2013 2012 £’000 £’000

After Assuming Net effect After Assuming Net effect reclass no reclass of reclass reclass no reclass of reclass

Securities reclassified to AFS 6,554 23,340 (16,786) 19,901 38,655 (18,754)

Securities reclassified to HTM 3,236 21,726 (18,490) 16,009 124,439 (108,430)

9,790 45,066 (35,276) 35,910 163,094 (127,184)

The above securities are denominated in EUR, JPY and USD. The impact of foreign exchange is managed by the Group and is economically hedged.

The reclassification has had the effect of limiting fair value movement volatility in the results of the Group.

Fair value hedges principally consist of inflation and interest rate swaps that are used to protect against changes in the fair value of bonds due to movements in market interest rates and inflation expectations. The hedged items are accounted for within the available for sale classification. For qualifying fair value hedges, all changes in the fair value of the derivative and in the fair value of the item in relation to the risk being hedged are recognised in the profit and loss account.

Fair value of derivatives designated as fair value hedges

Group and Company

2013 2012 £’000 £’000

Assets Liabilities Assets Liabilities

Instrument type:

Inflation 14,441 50,593 30,344 65,532

Interest 648 3,932 47 -

Total 15,089 54,525 30,391 65,532

Gains or losses arising from fair value hedges

Group and Company

2012 2013 £’000 £’000

Gains/(losses):

- on hedging instruments (9,935) (31,333)

- on the hedged items attributable to the hedged risk 13,522 34,907

Net gains 3,587 3,574

18 Cash flow hedges

The Group uses foreign currency exchange contracts to hedge the foreign currency risks arising from recognised financial assets denominated in foreign currencies.

Fair value of derivatives designated as cash flow hedges

Group and Company

2013 2012 £’000 £’000

Assets Liabilities Assets Liabilities

Instrument type:

Foreign currency exchange contracts 3,952 20,973 4,815 66,851

Group and Company

2013 2012 £’000 £’000

Cash flow hedging reserves

Opening balance 262 (10,001)

Net movement in reserves (481) 10,263

Closing balance (219) 262

Net movement in reserves comprises additions to the balance from movements in the value of derivatives designated in effective hedges and reclassifications of balances from the reserve into Net trading income. The closing reserve balance is presented net of tax. Reserve balances are transferred to the profit and loss account in the same periods during which the hedged items affect profit or loss.

The gains and losses on ineffective portions of derivatives designated in cash flow hedging relationships are recognised immediately in the Net trading income in the profit and loss account. During the year, the ineffectiveness recorded in the income statement was not material (2012: not material).

The gains and losses on ineffective portions of fair value hedges are recognised immediately in dealing profits.

17 Fair value hedges (continued)

The cash flows of the hedged item and the hedging instruments are expected to occur before the end of 2017.

Movements in cash flow hedging reserves


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19 Called up share capital

Group and Company

2013 2012

No. ’000 £’000 No. ’000 £’000

Ordinary shares of £1 each:

Authorised 1,000,000 1,000,000 1,000,000 1,000,000

Allotted, called up and fully paid at 31st December 760,611 760,611 760,611 760,611

Group and Company

Cash flow Total retained AFS hedging Retained earnings and reserve reserves earnings reserves £’000 £’000 £’000 £’000

Balance at 1st January 2013 (15,313) 262 147,703 132,652

Net movement in reserve 10,714 (481) 3,306 13,539

Balance at 31st December 2013 (4,599) (219) 151,009 146,191

20 Retained earnings and reserves

Group and Company

2013 2012 £’000 £’000

Opening shareholder’s funds 893,263 835,846


Actuarial loss on pension (net) (1,406) (2,373)

Other recognised gains and losses relating to the year (net) 10,233 22,802

Closing shareholder’s funds 906,802 893,263

21 Reconciliation of movements in shareholder’s funds

Shareholder’s funds are solely attributable to Equity Interests.

Group and Company

2013 2012 £’000 £’000

Trading securities 1,631,251 3,203,864

Investment securities 1,303,464 1,508,032

Total assets pledged as collateral 2,934,715 4,711,896

22 Collateral

Assets are pledged as collateral to secure liabilities under repurchase agreements, securities lending agreements, borrowing transactions, to note holders as part of structuring transactions and agreements for derivative transactions. The following table summarises the nature and carrying amount of the assets pledged as security against these liabilities:

Assets pledged as collateral

Group and Company

2013 2012

£’000 £’000

Fair Value Sold or repledged Fair Value Sold or repledged

Fair value of securities accepted as collateralwith the right to resell or repledge 42,112,746 39,004,975 29,882,094 26,857,485

These balances represent substantially all of the collateral received by the Group in relation to assets. The Group has the obligation to return the collateral on the maturity date of the secured transaction. The process by which assets are pledged as collateral and accepted as collateral is conducted under the terms that are usual and customary to the business stated.

Transferred Assets

The Group enters into transactions in the normal course of business by which it transfers recognised financial assets to third parties or to special purpose entities, but the transfer does not qualify for de-recognition as stated in the accounting policies. The Group will continue to recognise financial assets transferred when it retains control of the security, retains rights to receive cash flows from the assets, and substantially all the risks and rewards of ownership. The carrying amount of debt securities that have been transferred to special purpose entities but do not meet the criteria for de-recognition are summarised below:

Group and Company

2013 2012

£’000 £’000

Securities transferred to special purpose entities 164,737 279,991

23 Credit exposure

In accordance with FRS 29 the maximum gross counterparty credit exposure as at 31st December 2013 before taking into account any collateral held or other credit enhancements unless such credit enhancements meet offsetting requirements as stated in the accounting policies was £52.9 billion (2012: £49.6 billion) and was represented by the Group’s current assets and non-current held to maturity assets. Throughout 2013, the Group had no assets that were past due or impaired.

The following table presents an analysis of the Group’s assets by the major rating agencies. If major rating agencies have different ratings for the same securities or counterparties, an average of the rating is used. Equity positions are considered to have no credit exposure and are reported as “Unrated”. The balances under “MUFG companies” relate to assets owed or guaranteed by MUFG.

2013

AAA AA- to A- to Lower Unrated MUFG AA+ A+ than A- companies

Trading securities 16% 18% 23% 27% 15% 1%

Reverse repurchase agreements 1% 27% 23% 21% - 28%

Cash collateral on securities borrowed 31% 1% 57% 4% - 7%

Cash collateral paid to derivatives counterparties - 11% 73% 2% - 14%

Derivatives - 4% 41% 8% - 47%

Financial assets designated at fair value - - 100% - - -

Other assets - equity finance assets - - - 48% - 52%

2012

AAA AA- to A- to Lower Unrated MUFG AA+ A+ than A- companies

Trading securities 46% 21% 7% 14% 12% -

Reverse repurchase agreements 1% 45% 21% 25% - 8%

Cash collateral on securities borrowed - 4% 32% 43% - 21%

Cash collateral paid to derivatives counterparties - 11% 71% 8% - 10%

Derivatives - 5% 43% 7% - 45%

Financial assets designated at fair value - - 100% - - -

Under certain transactions, including reverse repurchase agreements and stock borrowing transactions, the Group is allowed to resell or repledge the collateral held. The fair value at the balance sheet date of collateral accepted and repledged to others was as follows:

22 Collateral (continued)Accepted collateral


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31st December 2013 Trading Available Held securities for sale to maturity and - debt - debt derivatives securities securities

Issuer Maturity Sovereign Other Sovereign Other Sovereign Total Country £’000 £’000 £’000 £’000 £’000 £’000

Belgium within 1 year - 7,861 100,212 - - 108,073

1 - 3 years (22,536) (1,221) - - - (23,757)

> 3 years - 6,667 - - - 6,667

(22,536) 13,307 100,212 - - 90,983

France within 1 year 28,682 (223,532) 80,593 - - (114,257)

1 - 3 years 70,563 172,692 166,607 - - 409,862

> 3 years (43,464) 110,247 29,090 - - 95,873

55,781 59,407 276,290 - - 391,478

Italy within 1 year 353,4891 24,886 - - 679,538 1,057,913

1 - 3 years - 23,867 - - - 23,867

> 3 years (5,413) 47,689 - - - 42,276

348,076 96,442 - - 679,538 1,124,056

Ireland within 1 year - 12,089 - - - 12,089

1 - 3 years - 5,066 - - - 5,066

> 3 years 2,677 15,054 - - - 17,731

2,677 32,209 - - - 34,886

Portugal within 1 year - 5,249 - - - 5,249

> 3 years 418 841 - - - 1,259

418 6,090 - - - 6,508

Spain within 1 year 74,421 (11,098) - - - 63,323

1 - 3 years (8,254) 48,074 - - - 39,820

> 3 years - 24,956 - - - 24,956

66,167 61,932 - - - 128,099

1 The balance includes derivatives bifurcated from host contracts classified as held to maturity assets. The host assets are government inflation linked bonds.

The carrying amounts of the Group’s exposures to certain European countries are as follows:

31st December 2012 Trading Available Held securities for sale to maturity and - debt - debt derivatives securities securities

Issuer Maturity Sovereign Other Sovereign Other Sovereign Total Country £’000 £’000 £’000 £’000 £’000 £’000

Belgium within 1 year - 26,567 65,463 - - 92,030

> 3 years 75,054 - - - - 75,054

75,054 26,567 65,463 - - 167,084

France within 1 year 305,353 (52,705) 266,504 - - 519,152

1 - 3 years 31,682 52,684 - - - 84,366

> 3 years (11,444) 47,674 - - - 36,230

325,591 47,653 266,504 - - 639,748

Italy within 1 year 215,5431 40,331 28,507 - - 284,381

1 - 3 years - 7,635 - - 664,743 672,378

> 3 years - 7,354 - - - 7,354

215,543 55,320 28,507 - 664,743 964,113

Ireland within 1 year - 19,238 - - - 19,238

1 - 3 years - 7,582 - - - 7,582

> 3 years - (76) - - - (76)

- 26,744 - - - 26,744

Portugal within 1 year - 90 - - - 90

> 3 years - 906 - - - 906

- 996 - - - 996

Spain within 1 year 12,258 11,755 28,603 2,076 - 54,692

1 - 3 years (17,051) 61,242 - - - 44,191

> 3 years - 88 - - - 88

(4,793) 73,085 28,603 2,076 - 98,971

1 The balance includes derivatives bifurcated from host contracts classified as held to maturity assets. The host assets are government inflation linked bonds.

Included in the table on the preceding page, “Other” refers to securities with issuers in that country except sovereigns or governments.

Derivatives are shown at fair value on a net basis. Derivative assets and derivative liabilities have been offset to present the net exposure to the relevant country. The impact of cash collateral held against these balances has not been included. The balances shown include derivative contracts segregated by country of incorporation of the counterparty, and credit derivatives which explicitly reference the sovereign or corporate exposure in that country (credit derivatives which reference indices are excluded). As at 31st December 2013, the Group had written credit protection covering government and corporate entities in France with notional £8.6 million and £53.7 million respectively (2012: £Nil) and Spain with notional £Nil (2012: £8.2 million); no net credit protection had been written covering the other countries in the table.

Derivatives with counterparties in these countries where the credit exposure is hedged through a financial guarantee provided by a fellow MUFG subsidiary are excluded from the table above.

The Group did not have any exposure to Greece as at 31st December 2013 (2012: £Nil).

23 Credit exposure (continued) 23 Credit exposure (continued)


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24 Guarantees, contingent liabilities and commitments

At the year end the Group was committed to making the following payments in respect of operating leases:

Group and Company

2013 2012 £’000 £’000

Other operating Buildings Other operating Buildings leases leases

Within 1 year 802 4,811 779 3,504

Within 1 - 2 years 202 5,226 802 4,811

Within 2 - 5 years - 15,678 202 15,678

After 5 years - 56,179 - 61,405

Total 1,004 81,894 1,783 85,398

At the year end, the Group was committed to provide collateralised financing facilities in favour of two investment grade financial counterparties. The facilities are provided in major currencies and total £978.1 million (2012: £Nil) equivalent, neither had been drawn against at year end. The facilities are required to be fully collateralised from a range of pre-defined debt securities limited to US Treasuries, and highly rated government or supra-national bonds. The facilities will expire during the 2014 financial year.

There were no other material outstanding guarantees or other contingent liabilities at the balance sheet date.

25 Inter-company transactions

Included within assets are the following balances due from MUFG companies:

Group and Company

2013 2012 £’000 £’000

Cash at bank 43,219 44,205

Reverse repurchase agreements - fair value 7,841,943 1,725,165

Securities sold not delivered 525,213 314,941

Cash collateral on securities borrowed 131,496 36,180

Cash collateral paid to derivative counterparties 199,059 103,448

Derivatives 2,338,535 3,565,678

Loans and advances to banks - reverse repurchase agreements 393,297 -

Other assets 10,712 5,708

11,483,474 5,795,325

Included within liabilities are the following balances due to MUFG companies:

Group and Company

2013 2012 £’000 £’000

Repurchase agreements - fair value 837,991 538,884

Securities bought not delivered 311,894 168,897

Cash collateral on securities lent 17,580 5,099

Cash collateral received from derivative counterparties 4,354,904 4,141,978

Derivatives 2,520,384 3,685,609

Financial liabilities designated at fair value 77,988 222,000

Other liabilities 16,727 14,456

8,137,468 8,776,923

26 Pension funds

The Group provides a defined contribution pension scheme, the Group Personal Pension Plan (“GPPP”), for employees of the Company. The assets of the scheme are held separately from those of the Company in an independently administered fund. The cost for the period recognised in the profit and loss was £7.3 million (2012: £5.2 million).

The Group also provides a funded defined benefit pension scheme which was closed to new entrants and future accrual in 2011. The assets of the scheme are held separately from those of the Company in a segregated fund administered by trustees.

An update to the last actuarial valuation was performed as at 31st December 2013 in accordance with the principles of FRS 17, the major assumptions were as follows:

Group and Company

2013 2012

Discount rate 4.7% 4.7%

Expected long-term rate of return on scheme assets 5.4% 5.2%

RPI Inflation assumption 3.6% 3.1%

CPI Inflation assumption 2.6% 2.3%

Limited price indexation pension increases 3.6% 3.1%

The underlying mortality assumption is based upon the standard table known as S1PXA_L on a year of birth usage with CMI_2011 future improvement factors and a long-term improvement rate of 1.0% p.a. (2012: 1.0% p.a.).

Employee benefit obligations

The amounts recognised in the balance sheet as at the year end are as follows:

Group and Company

2013 2012 £’000 £’000

Present value of scheme liabilities (125,924) (116,708)

Market value of scheme assets 137,269 111,752

Surplus / (deficit) in the scheme 11,345 (4,956)

Surplus not recognised (11,345) -

Recognisable deficit in the scheme - (4,956)

Related deferred tax asset - 1,140

Net pension liability - (3,816)

The amounts recognised in the profit and loss account for the year end are as follows:

Group and Company

2013 2012 £’000 £’000

Interest on scheme liabilities (5,467) (5,183)

Expected return on scheme assets 5,4671 5,302

Past service cost -2 -

Total - 119

1 The expected return on Scheme assets was £6.0 million, but this has been restricted to equal the interest cost due to the existence of unrecognised surplus.

2 Actual Past Service Cost was £0.6 million, but this has been extinguished by the application of part of the unrecognised surplus.


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Group and Company

2013 2012 £’000 £’000

Present value of scheme liabilities at the beginning of the year (116,708) (106,121)

Past service cost (626) -

Interest cost (5,467) (5,183)

Actuarial losses (4,689) (7,792)

Benefits paid 1,566 2,388

Present value of scheme liabilities at the end of the year (125,924) (116,708)

Group and Company

2013 2012 £’000 £’000

Market value of scheme assets at the beginning of the year 111,752 100,723

Expected return 5,961 5,302

Actuarial gains 14,602 4,945

Benefits paid (1,566) (2,388)

Contributions paid by the Company 6,520 3,170

Market value of scheme assets at the end of the year 137,269 111,752

Actual return on scheme assets 20,563 10,247

The agreed contribution to be paid by the Company for the forthcoming year (year ending 31st December 2014) is £6.8 million.

The major categories of scheme assets as a percentage of total scheme assets for the year end are as follows:

Group and Company

2013 2012

Equities and property 79% 74%

Bonds 6% 9%

Cash and Managed Fund deposits 15% 17%

Total 100% 100%

The expected long-term rate of return on the scheme assets has been calculated based upon the major asset categories shown in the above table and an expected rate of return on equities and property of 6.5% (2012: 6.5%), an expected rate of return on bonds of 4.2% (2012: 3.6%) and an expected rate of return on cash of 0.5% (2012: 0.5%).

The amounts recognised in the statement of total recognised gains and losses (“STRGL”) for the year end are as follows:

Group and Company

2013 2012 £’000 £’000

Actual return less expected return on scheme assets 14,602 4,945

Experience gains and losses arising on scheme liabilities (830) (533)

Changes in assumptions underlying the present value of scheme liabilities (3,859) (7,259)

Actuarial loss arising from unrecognised surplus (11,477) -

Actuarial loss recognised in STRGL (1,564) (2,847)

Changes in the fair value of the scheme assets for the year end are as follows:

Changes to the present value of the scheme liabilities for the year end are as follows:

26 Pension funds (continued)Cumulative amount of actuarial gains and losses recognised in STRGL for the year are as follows:

Group and Company

2013 2012 £’000 £’000

Cumulative actuarial losses at the beginning of the year (28,733) (25,886)

Recognised during the year (1,564) (2,847)

Cumulative actuarial loss at the end of the year (30,297) (28,733)

Group and Company

2013 £’000

Unrecognised (surplus) / deficit at start of year -

Loss recognised in STRGL (11,477)

Elimination of past service cost 626

Restriction of expected return on assets (494)

Unrecognised surplus at end of year (11,345)

Movement in recognisable deficit during the year are as follows:

Group and Company

2013 2012 £’000 £’000

Recognisable deficit in scheme at the beginning of the year (4,956) (5,398)

Expenses recognised in profit and loss - 119

Contributions paid by the company 6,520 3,170

Recognised actuarial losses (1,564) (2,847)

Recognisable deficit in scheme at the end of the year - (4,956)

Summary of the amounts for the current and four prior accounting periods are shown below:

Group and Company

2013 2012 2011 2010 2009 £’000 £’000 £’000 £’000 £’000

Present value of scheme liabilities (125,924) (116,708) (106,121) (96,982) (96,955)

Market value of scheme assets 137,269 111,752 100,723 104,685 89,746

Surplus / (deficit) in the scheme 11,345 (4,956) (5,398) 7,703 (7,209)

Surplus not recognised (11,345) - - (7,703) -

Recognisable deficit in the scheme - (4,956) (5,398) - (7,209)

Actual return less expected return on scheme assets 14,602 4,945 (10,261) 5,783 9,565

Experienced gains / (losses) arising on scheme liabilities (830) (533) (833) 750 1,763

Change in assumptions underlying present value of scheme liabilities (3,859) (7,259) (5,639) (2,672) (20,215)

Development of unrecognised surplus:

26 Pension funds (continued)

Financial Statements 2013 This publication should not be viewed as a ‘personal recommendation’ within the meaning of the Financial Conduct Authority rules.

27 Client money

As at 31 December 2013 and 2012, no significant client money balances were held by the Company.

28 Related party transactions

Disclosures in respect of related party transactions are not required because the Group, as a wholly owned subsidiary, is entitled to the exemption given in Financial Reporting Standard 8.

29 Consolidated group companies

The Company owns the whole of the issued ordinary share capital in the following subsidiary

30 Group structure

The Group’s immediate parent undertaking is Mitsubishi UFJ Securities Holdings Co., Ltd., a company registered in Japan. The Group’s ultimate parent company and ultimate controlling party is Mitsubishi UFJ Financial Group, incorporated in Japan.

The audited consolidated financial statements of Mitsubishi UFJ Securities Holdings Co., Ltd. are made available to the public annually and may be obtained from its registered office at:

Mitsubishi UFJ Securities Holdings Co., Ltd.5-2, Marunouchi 2-chomeChiyoda-kuTokyo 100-0005Japan

The audited consolidated financial statements of Mitsubishi UFJ Financial Group, Inc. are made available to the public annually and may be obtained from:

Mitsubishi UFJ Financial Group, Inc.7-1, Marunouchi 2-chomeChiyoda-kuTokyo 100-8330Japan

Country of Main activity Issued oridinary incorporation share capital

TMI Nominees Limited United Kingdom Nominee for Mitsubishi UFJ £1

Securities International plc.

The Company has consolidated the following special purpose entities where the Company has the power to exercise control. However, the Company does not hold any of the issued share capital. These entities were liquidated in January 2013.

Country of Main activity Issued oridinary incorporation share capital

Asset Finance Corporation Limited Cayman Islands Structured transactions and USD 1,000

derivative trading

TROR Corporation Limited Cayman Islands Structured transactions and USD 1,000

derivative trading

Mitsubishi UFJ Securities International plcRopemaker Place25 Ropemaker StreetLondon EC2Y 9AJ

www.int.sc.mufg.jp

Mitsubishi UFJ Securities International plc (‘MUSI’) is registered in England, company number 1698498, at Ropemaker Place, 25 Ropemaker Street, London EC2Y 9AJ, and is part of the Mitsubishi UFJ Financial Group (Mitsubishi Group). MUSI is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority.

This report is prepared for professional investors and is not intended for ‘Retail Clients’ as defined in the Financial Conduct Authority Rules and Prudential Regulation Authority Rules and should not be passed onto any such persons. This publication is for information purposes only. Information contained herein has been obtained from sources believed to be reliable but MUSI does not guarantee its accuracy or completeness. Any reference to past performance should not be taken as an indication of future performance. Any opinions or recommendations are those of the author and are subject to change without notice. For the purpose of distribution in the United States this report is only intended for persons who can be defined as ‘Major’ US Institutional Investors or US Institutional Investors pursuant to Rule 15a-6 under the U.S. Securities Exchange Act of 1934. Any ‘Major’ US Institutional Investors or US Institutional Investor that receives this report and wishes to effect a transaction in any security discussed herein should contact Mitsubishi UFJ Securities (USA), Inc. In addition, the provision of investment services may be restricted in certain jurisdictions. Products and services referred to herein are offered only in jurisdictions where and when they may be lawfully offered by MUSI or members of the Mitsubishi Group. We will not provide any products or services described herein to any person if the provision of such products or services would be in violation of the law of such person’s home country jurisdiction or any other related jurisdiction. Neither MUSI nor any of its affiliates accept any liability whatsoever for any direct or consequential loss arising from any use of information or material contained herein.

financial statements - london stock exchange · 2014. 6. 18. · financial statements 2013 page 1...

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