Exclusive-UK regulators lift punitive capital demands on Nomura, sources say

By Stefania Spezzati

LONDON (Reuters) – UK regulators eased capital demands on Nomura Holdings Inc. that had been place after it lost $2.9 billion on fund Archegos, according to two people with knowledge of the matter, freeing up the firm from a punitive measure that curbed risk-taking.

The Prudential Regulation Authority (PRA), the Bank of England’s supervisory arm, at the end of 2023 told Japan’s largest brokerage firm it no longer had to set aside extra capital in its European unit, the sources said, requesting anonymity because the matter is private.

The PRA’s decision comes after the Tokyo-based firm made progress on a remediation plan that required Nomura to improve its risk monitoring and control systems, one of the sources added.

The additional capital that Nomura now has available will be invested in its wholesale business in Europe, the same person said, without elaborating further.

The curb’s removal and its existence hasn’t been previously reported. Reuters couldn’t establish the exact size of the buffer that was required but the person described it as “significant”.

A spokesperson for the PRA declined to comment.

A representative for Nomura in London, the headquarters of its European subsidiary, said the firm cannot comment on confidential conversations that take place with regulators.

Since taking over Lehman Brothers Holdings Inc.’s operations outside the U.S. during the financial crisis the Japanese brokerage has been through a number of restructurings.

Chief Executive Kentaro Okuda in November said that Nomura aims to achieve stability and control costs at its wholesale business which comprises the trading and investment banking activities the firm carries out including in the UK.

It is currently re-allocating resources away from trading in fixed income and foreign exchange to less risky business such as advisory and wealth management to reduce costs and improve profitability, Okuda said in the November strategy update.

The PRA’s capital demands were placed on Nomura in addition to requirements that financial institutions typically have to satisfy, both sources said.

After the 2008 financial crisis, regulators imposed rules that require financial institutions to hold a certain level of capital to navigate crises, but watchdogs can apply additional restrictions, especially if they detect potential risks into how firms are managed.

The Japanese brokerage isn’t considered a globally systemically important financial institution by the Financial Stability Board, a body created after the 2008 crisis to improve the financial system’s soundness. But UK regulators have identified its London-based European subsidiary as a firm that fits that description in Britain.

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Nomura’s Archegos hit was the second-biggest by a bank after Credit Suisse’s $5.5 billion loss.

The unravelling of Archegos triggered an industry-wide review led by the PRA of the prime-brokerage industry which caters to hedge funds by lending them cash and securities.

UK regulators demanded that Nomura implemented a remediation plan. The Japanese brokerage has been working with consulting firm McKinsey since 2021, one of the two people told Reuters.

The PRA declined to comment on the plan. A representative for McKinsey also declined to comment.

“Embedding risk culture continues to be a major ongoing focus for the firm,” a spokesperson at Nomura said.

Nomura has said it has boosted its risk management and controls and has reduced its prime-brokerage business while replacing senior executives.

The firm established a board risk committee and appointed in 2021 Vijay Sundaram as global head of wholesale front office risk and control to increase supervision at its trading and investment bank operations.

Nomura’s share price is up 34% since the start of the year as Japanese equities markets rallied.

In its third quarter, which ended in December, the wholesale unit delivered a pretax profit of 23 billion yen following a loss of 1.9 billion yen in the same quarter of the previous year.

It contributed 30% of group income.

The bank has recently made a selective comeback into equities. It expanded desks in Europe and in Asia with a focus on equity financing which includes loans backed by shares to clients, the sources said.

In October 2022, Christopher Willcox was named head of the wholesale division and executive officer.

“We strive to improve our wholesale business,” said Okuda in November. “We are adjusting risk positions and redistributing our resources.”