Daiwa Securities Group Annual Report 2012 The Group uses VaR as well as Stressed VaR in which indicates  maximum potential loss under stress period. In addition, in order  to test accuracy of VaR, the Group conducts back-testing so as  to reconcile VaR against actual profit and loss. Likewise, stress  test is conducted in order to grasp possible loss incurred as a  result of historical and hypothetical stress event. Under the Group’s trading position, with considering soundness in  financial outstanding and business plan, and budget, limits on  VaR, position, and sensitivity are set. The Group’s Risk  Management Department monitors market risk and accordingly  reports to the managements daily. Back testing is being conducted in order to verify accuracy of  VaR model. In addition, so as to support VaR which have calcu- lated based upon given time horizon and statistical hypothesis,  stress test is conducted by applying historical and hypothetical  stress events as a scenario. Not applicable Not applicable 8. Market Risk 9. Operational Risk 10. Overview of Risk Management Policy and Procedure for Equity Exposure on Non Trading Accounts ii. Standardized Approach General market risk for Daiwa Securities Capital Markets, and  foreign subsidiaries Specific risk General market risk that is not included in above query “i.” Historical simulation model that uses historical market scenario  are used. Assumptions of historical simulation model are stated as  followings: (Note 2) As for March 2012, observation holding period as for VaR calculation  has changed from a 1 day holding period scaled up to 10 days to a 10 days  holding period. The Group’ sets forth the policies and operational manual regard- ing valuation. The independent risk control department from the  department which engages with trading businesses carefully  analyzes and reviews the relevancy of value and valuation method,  and such results are periodically reviewed by the external audit. GLYPH<129> Holding Period:  10 business days GLYPH<129> Observation Period: 520 business days GLYPH<129> Confidence Level: 99% work processes to reduce human error, prepares business manu- als, and takes other necessary measures. Each Group company  strives to reduce operational risk according to the nature of its  own business. As the Group’s business becomes more sophisticated, diversified,  and systemized, the accompanying risks become more varied,  and as a result the need to manage such operational risk grows  each year. The Group’s major subsidiary companies engage in  RCSA (Risk Control Self Assessment) in compliance with opera- tional risk management rule, and adequately manage operational  risk. In addition, due to the diversifying nature of its business, the  Group also sets rigid rules concerning authority, automates office  The Basic Indicator Approach is used for the calculation of opera- tional risk amount. scopes of the risk management are equity exposures. Those are  subject to the risk management in each classification. Also, marketable available-for-sale securities are stated at their fair  values based on quoted market consolidated closing prices (the  unrealized gain or loss is fully recognized, and the cost of products  sold is mainly pursuant to moving average method). Non-marketable  available-for-sale securities are carried at cost by moving average  method. The Group holds financial instruments for non trading businesses  such as principal investments business, venture capital business, and  investment securities for the business relationship. Because those  financial instruments have specific risk profiles for each product, the  Group conducts adequate credit as well as market risk managements  including measurement of risk by the profile. For the consolidated subsidiaries, the scopes of the risk manage- ment are assets and liabilities. For the affiliated companies, the  97 i. Internal Models Approach E). Overview of the model used when incremental risk is  measured by internal model. F). Overview of the model used when comprehensive risk is  measured by internal model. G). Assumptions and the methods in internal capital adequacy  assessment of market risk. D). Overview and the explanation of internal model and  explanation of back-testing and stress test A). Overview of risk management policies and procedures B). Methods used for calculation of market risk C). The method in order to adequately evaluate price in  accordance with characteristics of the product/transaction,  with recognizing the assumed holding period and the inability  to close the positions within the period A). Risk management policies and procedures B). Methods for the calculation of operational risk amount