Daiwa Securities Group Annual Report 2012 Major Risks and Methods of Management <Market Risk Management> <Management of Market Risk and Credit Risk Unrelated to  Trading Positions> <Liquidity Risk Management> <Credit Risk Management> Market risk refers to the risk of incurring losses due to market fluc- tuations, which affect the value of stock prices, interest rates, for- eign exchange rates, and commodity prices. In terms of the Group’s trading positions, the Group sets limits  on Value at Risk (VaR), which indicates maximum potential loss at a  specific confidence level, position, and sensibility, with consider- ation given to the financial status of the Group and the business  plans and budgets of the departments exposed to trading posi- tions. The Risk Management Department monitors market risk for  the Group as a whole and reports daily on the status of market risk  to management. In addition, considering the case of severe market  fluctuation and potential VaR, which do not appear under the cal- culation based on statistical hypotheses drawn from set time peri- ods of empirical data, the Group carries out stress tests using  scenarios based on actual empirical market data, as well as hypo- thetical stress event scenarios. Credit risk refers to the risk of any losses caused when a client to  which the Group extended credit suffers a deterioration in financial  conditions, a valuation loss on assets (including off-balance-sheet  assets), or for some other reason is unable to repay its debt. Before the Group can take on a transaction involving credit risk  in its trading position, the Group assigns a line of credit to the  counterparty mainly based on its credit rating. Subsequently, the  Group carefully monitors estimations of the notional value of the  relevant principal and adherence to the amount of credit used. In particular, in businesses such as the wholesale business,  where the exposure to credit risk is comparatively high, the Group  determines the credit standing of each counterparty by conducting  quantitative and qualitative evaluations based on a credit evaluation  model. The Group then assigns a line of credit to each counter- party, taking into account various transaction conditions such as  the credit period and availability and appropriateness of collateral.  In addition, the Group measures credit-VaR and also periodically  monitors the effects of large exposure to a single counterparty. The Group also owns private equity and other investments related  to principal investment businesses and venture capital, and loans  and marketable securities related to the banking business, as well  as investment securities unrelated to its trading positions that are  held for a long-term perspective for the purpose of maintaining  business relationships. Although such assets are also exposed to  market and credit risks, the risk management of such assets is  conducted in accordance with the risk characteristics unique to  each line of business. Liquidity risk refers to the risk of suffering losses due to cash man- agement difficulties or becoming subject to financing at markedly  higher costs than usual as a result of an abrupt change in market  conditions or a worsening of the Group’s finances. The Group,  while employing a variety of financial assets and liabilities, conducts  its business with a focus on securities-related operations as its core  business. Accordingly, it procures funds based on the policy of  efficiently and periodically ensuring ample liquidity necessary for the  continuation of its business. In order to prevent fluctuations in the market from affecting the  continuation of our business activities, the Group is constantly  striving to secure the stability of fund procurement. Particularly in  recent years, the Group has been accumulating liquidity through  such means as fund procurement through the market as well as  loans from financial institutions, in preparation for unforeseen  events such as those caused by global financial crises or credit  crunches. Additionally, as it can be anticipated that such crises may  make it difficult to procure new funds and reacquire existing funds,  the repayment periods of procured capital are staggered with funds  procured from diverse sources. 41