JAPAN SECURITIES FINANCE CO., LTD.

The Loan for Stock Transaction Business is licensed by the Prime Minister under Article 156-24 of the Financial Instruments and Exchange Act, and the subsidiary Japan Securities Finance Trust and Banking is also operated under licenses and approvals granted under the Banking Act and other laws. If the Company were to be subject to license revocation, business suspension, or other administrative sanctions for any reason, this could have a material impact on the financial position and operating results of the Company group. At present, no circumstances that would give rise to such sanctions have occurred, but since the scope of business of securities finance companies is restricted by laws and regulations, there is also a risk of losing business opportunities if approval for new businesses cannot be obtained.

The Company conducts regular training and awareness-raising activities centered on the Compliance Management Department, but if compliance risk materializes due to intentional or negligent acts by officers or employees, the Company could face deterioration of trust relationships with business partners, damages claims, administrative sanctions, and other consequences. It is also necessary to keep in mind that new compliance risks may arise as business operations become more complex due to the commencement of new businesses. The Company addresses this through sharing of information and awareness among group companies, but if such risk materializes as a legal entity, the impact would extend to the financial position and operating results.

The Loan for Stock Transaction Business is the Company's licensed business and forms the foundation of its earnings, but if usage by individual investors decreases due to stock market trends and other factors, resulting in a decline in the standardized margin trading balance and loan for stock transaction balance, this could affect the financial position and operating results. As individual investors' investment styles diversify toward futures trading and general margin trading, the Company is engaged in promotional activities for standardized margin trading and loan for stock transactions, but these efforts do not necessarily translate directly into balance growth. In phases where trading volume in the stock market contracts, this remains a significant risk factor even as diversification of the earnings base progresses.

As part of its ALM activities, the Company group holds domestic and foreign bonds, foreign currency-denominated securities, marketable stocks, unlisted investment trusts, and other assets, and valuation losses or realized losses may occur due to sharp increases in interest rates, yen appreciation, stock price declines, and other factors. Losses may also arise if changes in monetary policy by central banks around the world or a loss of confidence in fiscal policy trigger a sharp rise in government bond yields, or if disruption in financial markets makes normal transactions difficult. The Company implements hedging operations using derivatives and other means, but if a sudden and drastic market fluctuation occurs, this could affect the financial position and operating results.

The Company group primarily relies on short-term funding methods such as call money, commercial paper, and bond repo transactions, and funding costs may rise or transaction restrictions may be imposed due to disruption in financial markets or a sharp rise in short-term interest rates. In addition, if the Company's credit rating is downgraded, including due to external factors such as a downgrade of Japanese government bonds, there is a risk that transaction terms may deteriorate and it may become difficult to secure sufficient funds and securities. The Company addresses this through diversification of funding methods and consolidated cash flow management with Japan Securities Finance Trust and Banking, but the financial impact would be significant if these risks materialize.

The Company, like securities companies, is required to maintain a capital adequacy ratio of 200%, and if this falls below the threshold, the Company could be subject to suspension of all or part of its eligibility to participate in Bank of Japan operations and other measures, which could impede stable business operations. The subsidiary Japan Securities Finance Trust and Banking is also required to maintain the domestic standard of a non-consolidated capital adequacy ratio of 4% or higher, and if it falls below this standard, there is a risk of receiving an order to suspend all or part of its business. The Company strives to maintain sufficient capital, but in the event of a tail risk occurring in financial markets, there is a past experience of recording a consolidated net loss, as in the 2008 Lehman Brothers collapse, and this requires ongoing attention.

The Company operates a variety of information systems, including systems necessary for the Loan for Stock Transaction Business as securities market infrastructure, and strives to prevent failures through dual redundancy of networks and equipment and the formulation of contingency plans. However, if a serious system failure that impedes business continuity occurs due to unforeseen factors, this could affect the financial position and operating results. Given its nature as securities market infrastructure, a system failure also carries the risk of spreading to the market as a whole, making this a particularly important risk item.

Amid heightened cyber risk due to advances in digital technology, sophisticated and elaborate cyberattacks could cause unexpected system failures that severely impede business continuity. In addition, if important information such as business partner information is leaked due to human error, misconduct, or external criminal activity, this could lead to a decline in creditworthiness and affect the financial position and operating results. The Company is working to strengthen its cybersecurity framework in collaboration with group companies and to develop and thoroughly disseminate security measures, but continuous response is required against increasingly sophisticated threats.

There is a risk that large-scale disasters, power outages, war, terrorism, infectious disease outbreaks, and other events could impede the business operations of the Company group. The Company has established a business continuity framework including a dual-operation system utilizing the Osaka Branch and other facilities, promotion of telework, and participation in joint drills at subsidiaries, but if an event significantly exceeding expectations occurs, an adequate response may be difficult. Given its responsibility as a company supporting securities and financial market infrastructure, maintaining the business continuity framework is a particularly important management issue.

The subsidiary Nihon Building faces the risk of deteriorating performance due to worsening real estate market conditions and rising vacancy rates, and if it undertakes strategic building reconstruction, temporary costs and a decline in rental income during the construction period may occur. In the information processing services business operated by two equity-method affiliates, there is a risk that a decline in client companies' willingness to invest in systems or the occurrence of system failures could affect equity-method investment gains and losses. If these risks specific to group companies materialize, this could affect the financial position and operating results of the Company group as a whole.