# SMBC NIKKO SECURITIES AMERICA, INC. X-17A-5 (2022-03-01) — Broker-dealer annual report
- Company: SMBC NIKKO SECURITIES AMERICA, INC.
- Form: X-17A-5
- Filed: 2022-03-01
- Period: 2021-12-31
- Accession: 0000875890-22-000003
- CIK: 875890
- File #: 8-43852
- Type: Broker-dealer
- Material weakness: No
- Auditor: KPMG LLP
- Auditor location: New York, NY
- Contact: DSohn@smbcnikko-si.com
- Phone: 917-262-2716
- Email: dsohn@smbcnikko-si.com
- Website: smbcnikko-si.com
- Signed by: Bungo Miura (President)
Original filing: https://www.sec.gov/Archives/edgar/data/875890/000087589022000003/SOFC_2021.pdf
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# **SMBC NIKKO SECURITIES AMERICA, INC. AND SUBSIDIARY** (An Indirect Subsidiary of Sumitomo Mitsui Banking Corporation)
Consolidated Statement of Financial Condition
December 31, 2021
(With Report of Independent Registered Public Accounting Firm Thereon)
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### **SMBC NIKKO SECURITIES AMERICA, INC. AND SUBSIDIARY**
(An Indirect Subsidiary of Sumitomo Mitsui Banking Corporation)
#### **Table of Contents**
| | Page(s) |
|---------------------------------------------------------|---------|
| Facing Page and Oath or Affirmation | |
| Report of Independent Registered Public Accounting Firm | |
| Consolidated Statement of Financial Condition | 1 |
| Notes to Consolidated Statement of Financial Condition | 2–14 |
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KPMG LLP 345 Park Avenue New York, NY 10154-0102
### **Report of Independent Registered Public Accounting Firm**
To the Stockholders and the Board of Directors SMBC Nikko Securities America, Inc. and subsidiary:
### *Opinion on the Consolidated Financial Statement*
We have audited the accompanying consolidated statement of financial condition of SMBC Nikko Securities America, Inc. and subsidiary (the Company) as of December 31, 2021, and the related notes (collectively, the consolidated financial statement). In our opinion, the consolidated financial statement presents fairly, in all material respects, the financial position of the Company as of December 31, 2021, in conformity with U.S. generally accepted accounting principles.
#### *Basis for Opinion*
This consolidated financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company's auditor since 2002.
New York, New York February 28, 2022
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### **SMBC NIKKO SECURITIES AMERICA, INC. AND SUBSIDIARY** (An Indirect Subsidiary of Sumitomo Mitsui Banking Corporation) **Consolidated Statement of Financial Condition December 31, 2021**
## **Assets** Cash and cash equivalents \$ 493,110,306 Securities purchased under agreements to resell, net 6,325,673,921 Securities owned, at fair value (including securities pledged of \$49,994,283) 1,295,259,633 Receivable from brokers, dealers and clearing organizations 441,208,164 Underwriting fee receivable 40,396,082 Receivable from affiliates 9,639,834 Furniture, equipment, and leasehold improvements, net of accumulated depreciation and amortization of \$17,762,347 44,874,805 Deferred tax assets, net 10,338,139 Other assets 44,804,574 Total assets \$ 8,705,305,458 **Liabilities and Stockholders' Equity** Liabilities: Securities sold under agreements to repurchase, net \$ 6,120,874,271 Securities sold, not yet purchased, at fair value 637,050,378 Payable to brokers, dealers and clearing organizations 39,818,472 Payable to affiliates 20,035,910 Accounts payable, accrued expenses, and other liabilities 96,236,350 Total liabilities 6,914,015,381 Commitments and contingencies Subordinated debt 225,000,000 Stockholders' equity: Common stock: Class A, \$0.10 par value. Authorized 50 shares; issued and outstanding 10 shares 1 Class B, \$0.10 par value. Authorized 9,950 shares; issued and outstanding 125 1,250 shares Class C, \$0.10 par value. Authorized 10,000 shares; issued and outstanding 5,290 shares 529 Additional paid-in capital 947,289,319 Retained earnings 618,223,248 Accumulated other comprehensive income 776,855 Total stockholders' equity 1,566,290,077 Total liabilities and stockholders' equity \$ 8,705,305,458
See accompanying notes to consolidated statement of financial condition.
#### 1
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### **(1) Organization**
SMBC Nikko Securities America, Inc. (the Company) is registered as a broker dealer under the Securities Exchange Act of 1934, is a member of the Financial Industry Regulatory Authority (FINRA) and is also registered with the Municipal Securities Rulemaking Board. The Company was incorporated on August 8, 1990 and commenced operations in December 1991. The Company is exempt from the Securities and Exchange Commission (SEC) Rule 15c3-3 pursuant to provisions (k)(2)(i) and (k)(2)(ii) of such rule and has other business activities contemplated by Footnote 74 of the SEC Release No. 34-70073 adopting amendments to 17 C.F.R. § 240.17a-5.
The Company provides underwriting services of debt and equity securities and provides services to assist in the sale of securities underwritten by other entities. The Company enters into repurchase and reverse repurchase agreements, engages in trading of U.S. government securities, corporate debt securities, and asset-backed securities. The Company also provides buy-back services to corporate clients for the purchase of clients' own stocks, and acts as selling agent by selling Japanese Domestic Equity Offerings to clients. The Company also acts as an originator, placement, and administrative agent in connection with the origination and servicing of asset-backed, secured lending, and asset purchase transactions on behalf of an affiliate. The Company's business lines also include brokerage services for certain debt and equity products, distribution of globally branded research reports, and merger and acquisition advisory services. The primary targets for these services are corporate issuers, and sophisticated institutional investors such as asset management companies, investment trusts, hedge funds, and trust banks.
The Company is an indirect majority-owned subsidiary of Sumitomo Mitsui Banking Corporation (SMBC) which is ultimately wholly owned by Sumitomo Mitsui Financial Group (SMFG), a Japanese corporation. SMBC Americas Holdings, Inc. (SMBC AH or Parent), a wholly owned U.S. subsidiary of SMBC, owns 80% of each of the outstanding Class A, Class B and Class C common stock, and SMBC Nikko Securities, Inc. (SMBC-Nikko) owns 20% of each of the outstanding Class A, Class B and Class C common stock. Refer to Note 10, Stock Rights and Privileges.
On June 1, 2018, SMBC Nikko Securities Canada, Ltd. (Nikko Canada) was incorporated in British Columbia, Canada as a wholly-owned subsidiary of the Company. Nikko Canada is established to underwrite and privately place Canadian securities on an economics only basis. Similar to the Company, Nikko Canada will not receive or maintain any customer funds or securities. Nikko Canada is a member of FINRA, as a broker dealer, the Ontario Securities Commission, and the Investment Industry Regulatory Organization of Canada (IIROC), the Canadian national self-regulatory organization, as an investment dealer and is therefore subject to the rules and regulations of all.
## **(2) Significant Accounting Policies**
#### *(a) Basis of Presentation and Use of Estimates*
The Company's consolidated statement of financial condition has been prepared in conformity with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of the consolidated statement of financial condition requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the consolidated statement of financial condition. Management believes that the estimates utilized in preparing its statement of financial condition are reasonable. Such estimates are subject to change in the future as additional information becomes available or previously existing circumstances are modified. Actual results could differ from those estimates. Items subject to such estimates and assumptions include the valuation of securities, realization of deferred tax assets.
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The consolidated statement of financial condition include the Company and its wholly owned subsidiary, Nikko Canada in which the Company has a controlling financial interest under voting interest entity model. All intercompany balances and transactions have been eliminated.
### *(b) Cash and Cash Equivalents*
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist of demand deposits held in banks which amounted to \$493,110,306 as of December 31, 2021.
Restricted cash is cash that is considered legally restricted as to withdrawal or usage. The Company identified restricted cash stated in other line items in the consolidated statement of financial condition.
### *(c) Securities Transactions*
Securities transactions are recorded on a trade-date basis. Securities owned are carried at fair value. At December 31, 2021, securities owned consist primarily of U.S. treasury securities, corporate debt securities, and asset-backed securities, of which \$49,994,283 is pledged to a clearing organization as collateral.
### *(d) Securities Sold, Not Yet Purchased*
The Company has sold securities that it does not own (i.e. securities sold short) and is therefore, obligated to purchase such securities at a future date. The Company has recorded this obligation on the consolidated statement of financial condition at the fair value of the securities sold short.
### *(e) Repurchase Agreements and Reverse Repurchase Agreements*
A reverse repurchase agreement (also known as a reverse repo) refers to a transaction that is accounted for as a collateralized lending in which the Company buys securities with an agreement to resell them to the counterparty at a stated price plus interest at a specified date or in specified circumstances. The receivable under a reverse repurchase agreement refers to the amount due from the counterparty for the repurchase of the securities from the Company.
A repurchase agreement (repo) refers to a transaction that is accounted for as a collateralized borrowing in which the Company sells those securities to a counterparty with an agreement to repurchase them at a stated price plus interest at a specified date or in specified circumstances. The payable under a repurchase agreement refers to the amount of the Company's obligation recognized for the future repurchase of the securities from the counterparty. Repurchase and resale agreements are presented on a net basis on the consolidated statement of financial condition where permitted by ASC 210-20, *Balance Sheet-Offsetting.*
The Company's policy is generally to take possession of securities purchased under agreements to resell, and to receive securities and cash posted as collateral (with rights of re-hypothecation). The market value of collateral accepted or pledged by the Company under reverse repurchase agreements and repurchase agreements before offsetting was \$10,721,316,484 and \$10,641,927,455 respectively at December 31, 2021. Substantially all of the collateral accepted under reverse repurchase agreements has been resold as collateral under repurchase agreements. Collateral received from counterparties are U.S. treasury securities and corporate debt securities, and valued daily, and should
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the market value of the securities received decline below the principal amount loaned plus accrued interest, additional collateral is requested when appropriate.
### *(f) Fair Value Measurement*
The Company follows ASC 820, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements. ASC 820, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. In accordance with ASC 820, when considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 - Valuation based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 - Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3 - Valuations based on inputs that are unobservable and supported by little or no market activity, and significant to the overall fair value measurement.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level of input that is significant to the fair value measurement in its entirety.
This hierarchy requires the use of observable market data when available. ASC 820 requires disclosure of fair value information for assets and liabilities that are measured at fair value on a recurring or nonrecurring basis on the consolidated statement of financial condition after initial recognition, including the valuation techniques and inputs used to develop those measurements. In determining fair value, the Company uses the market approach. Based on this approach, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk.
The following are the types of valuation methodologies for the Company's material categories of financial assets and financial liabilities that are fair valued on the consolidated statement of financial condition:
**U.S. treasury securities** U.S. treasury securities are valued using quoted market prices and are generally classified as Level 1 in the fair value hierarchy.
**Money-market securities** Money market securities are model-based with observable market inputs and are generally classified as Level 2.
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**Corporate debt securities** Corporate debt securities are valued based on either the most recent observable trade and or external quotes, depending on availability. Corporate debt securities are generally classified as Level 2 in the fair value hierarchy because these valuation inputs are usually observable or market corroborated when obtained from alternative pricing sources.
**Asset-backed securities** Asset-backed securities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. As such, asset backed securities are categorized as Level 2. Most of the asset-backed-securities in inventory are collateralized auto loans and credit card loans.
**Equity securities** Equity securities including Exchange Traded Funds are traded on the stock exchange and stated at the last reported sales price. These securities are actively traded and are generally classified as Level 1.
As of December 31, 2021, the Company has no assets or liabilities measured at fair value on a recurring basis that it classifies as Level 3.
Repo and reverse repos are not carried at fair value on the consolidated statement of financial condition, but are carried at amounts which approximate fair value due to their short-term nature and negligible credit risk. The Company reports reverse repo and repo agreements at contract prices, plus accrued interest, which are considered level 2 financial instruments.
### *(g) Furniture, Equipment, and Leasehold Improvements*
Furniture, equipment, and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Depreciation on furniture and equipment is provided on a straight-line basis over the assets' estimated useful lives of the assets. The range of estimated useful lives is 5 years for furniture and equipment, and 5 to 7 years for software. Leasehold improvements are amortized on a straight-line basis over the shorter of the term of the lease or the estimated useful life of the improvement, subject to an upper limit of 15 years.
The Company leases office space under operating leases that do not contain material variable lease payments or residual value guarantees. The Company assesses whether an arrangement is a lease or contains a lease at inception of the arrangement. For arrangements considered leases, the Company records a ROU asset and lease liability at the lease commencement date, which is the date that the underlying asset becomes available for use.
ROU assets, which represent the Company's right to use the underlying asset for the lease term, and the related lease liabilities, which represent the present value of the Company's obligations to make payments arising over the lease term, are reported in "Furniture, equipment, and leasehold improvements, net of accumulated depreciation and amortization", and "Accounts payable, accrued expense and other liabilities", respectively, on the consolidated statement of financial condition.
#### *(h) Foreign Currency*
Assets and liabilities denominated in non-U.S. dollar currencies are remeasured into U.S. dollar equivalents using year-end spot foreign currency rates. The effects of foreign currency translations of the statement of financial condition of the Company's consolidated subsidiary where the functional currency is other than U.S. dollar are included in accumulated other comprehensive income of the stockholders' equity in accordance with ASC 830, *Foreign Currency Matters*.
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### *(i) Compensation and Benefits*
The Company pays discretionary cash bonuses to its employees. Starting in 2012, certain cash bonuses are deferred over a service period of three years. An employee with a deferred bonus earns a portion of the cash bonus in each of the three years if they continue employment at the Company. The Company recognizes compensation and benefits expense on a straight-line basis. All deferred cash bonuses have clawback provisions. None of the clawback provisions has been triggered for the year ended December 31, 2021. The deferred compensation liability amounts to \$4,309,726 as of December 31, 2021.
#### *(j) Income Taxes*
The Company accounts for all income taxes in accordance with the asset-and-liability method of accounting required under ASC 740, *Income Taxes*. Under this method, deferred income taxes are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled.
It is the Company's policy that, pursuant to ASC 740, any state or local tax computed based on capital is considered a franchise tax.
### **(3) Fair Value of Financial Instruments**
The following are types of financial instruments the Company held as of December 31, 2021:
| | Fair Value Hierarchy | | | | | | | |
|-----------------------------------------|----------------------|-------------|----|---------------|----|---------|----|---------------|
| | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Securities owned | | | | | | | | |
| U.S. treasury securities | \$ | 164,919,707 | \$ | — | \$ | — | \$ | 164,919,707 |
| Corporate debt securities | | — | | 967,974,554 | | — | | 967,974,554 |
| Asset backed securities | | — | | 134,767,988 | | — | | 134,767,988 |
| Money market securities | | — | | 27,203,620 | | — | | 27,203,620 |
| Other | | — | | 393,764 | | — | | 393,764 |
| Total securities owned | \$ | 164,919,707 | \$ | 1,130,339,926 | \$ | — | \$ | 1,295,259,633 |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Securities sold, not yet purchased | | | | | | | | |
| U.S. treasury securities | \$ | 110,796,514 | \$ | — | \$ | — | \$ | 110,796,514 |
| Equity securities | | 127,728,240 | | — | | — | | 127,728,240 |
| Corporate debt securities | | — | | 398,525,624 | | — | | 398,525,624 |
| Total securites sold, not yet purchased | \$ | 238,524,754 | \$ | 398,525,624 | \$ | — | \$ | 637,050,378 |
Other consists of equity shares issued by DTCC to the Company, which amounts to \$393,764.
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### **(4) Receivable from and Payable to Brokers, Dealers, and Clearing Organizations**
Amounts receivable from and payable to brokers, dealers, and clearing organizations at December 31, 2021 consist of the following:
| | Receivable | Payable |
|--------------------------------------|-------------------|------------------|
| Brokers and clearing organizations | \$
363,019,010 | \$
39,818,472 |
| Deposits with clearing organizations | 60,250,000 | — |
| Trades pending settlement, net | 17,939,154 | — |
| Total | \$
441,208,164 | \$
39,818,472 |
The Company clears its customer transactions through another broker-dealer on a fully disclosed basis under (k)(2)(ii) or promptly transmits funds or securities received to Special Account for the Exclusive Benefit of Customers under (k)(2)(i) for securities transactions which are not cleared through another broker-dealer on a fully disclosed basis. The amount receivable from broker, dealers and clearing organizations relates to the aforementioned transactions.
Trades pending settlement represents the contract price of securities to be received or delivered net by the contract price of securities to be delivered or received by the Company. The value of such securities at December 31, 2021 approximates the amounts owed. Trades pending settlement at December 31, 2021 were settled without a material effect on the Company's consolidated statement of financial condition.
At December 31, 2021, cash included in deposits with clearing organizations amounting to \$60,250,000 is pledged with two clearing organizations as collateral to meet depository requirements which vary depending on daily activity. As of December 31, 2021, the minimum cash requirement amounts to \$5,000,000, which is accounted for as restricted cash. Refer to consolidated statement of cash flow for reconciliation to cash and cash equivalents and restricted cash.
### **(5) Collateralized Transactions**
The Company enters into reverse repurchase agreements and repurchase agreements to accommodate customers' needs and invest the Company's capital. The Company manages credit exposure arising from such transactions by, in appropriate circumstances, entering into master repurchase agreements with counterparties that provide the Company, in the event of a counterparty default (such as bankruptcy or a counterparty's failure to pay or perform), the right to net a counterparty's rights and obligations under such agreement and liquidate and setoff collateral against the net amount owed by the counterparty.
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## **SMBC NIKKO SECURITIES AMERICA, INC. AND SUBSIDIARY**
(An Indirect Subsidiary of Sumitomo Mitsui Banking Corporation)
**Notes to Consolidated Statement of Financial Condition**
#### **December 31, 2021**
The following tables present information about the offsetting of these instruments and related collateral amounts.
| | Gross
amounts | Amounts
offset in the
consolidated
statement of
financial
condition (i) | Net amounts
presented in
the consolidated
statement
of financial
condition | Noncash collateral
not offset in the
consolidated
statement of
financial
condition (ii) | Net
Amount |
|----------------------------------------------------|----------------------|----------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|---------------|
| Assets: | | | | | |
| Securities purchased under
agreements to resell | | | | | |
| U.S. treasuries | \$
10,669,054,674 | \$
(4,399,696,682) \$ | 6,269,357,992 | \$
(6,264,714,015) \$ | 4,643,977 |
| Corporate bonds | 56,315,929 | — | 56,315,929 | (54,928,678) | 1,387,251 |
| Total | \$
10,725,370,603 | \$
(4,399,696,682) \$ | 6,325,673,921 | \$
(6,319,642,693) \$ | 6,031,228 |
| Liabilities: | | | | | |
| Securities sold under | | | | | |
| agreements to repurchase | | | | | |
| U.S. treasuries | \$
10,520,570,953 | \$
(4,399,696,682) \$ | 6,120,874,271 | \$
(6,120,874,271) \$ | — |
| Total | \$
10,520,570,953 | \$
(4,399,696,682) \$ | 6,120,874,271 | \$
(6,120,874,271) \$ | — |
(i) Amounts offset in the consolidated statement of financial condition related to master netting agreements and similar agreements which have been determined by the Company to be legally enforceable in the event of default and where certain other criteria are met in accordance with ASC 210-20.
(ii) Amounts relating to agreements where the Company does not have a legal right of offset as certain criteria are not met in accordance with ASC 210-20. There are limits in the disclosure regarding the inclusion of excess collateral amounts. The amount of collateral pledged is limited to the net amount of securities sold under agreement to repurchase presented on the consolidated statement of financial condition and excludes overcollateralization.
The Company offsets its securities purchased under agreements to resell and securities sold under agreements to repurchase, in accordance with ASC 210-20*.*
The table below represents payables under repurchase agreements by remaining contractual term to maturity and class of collateral pledged as of December 31, 2021.
| | Remaining Contractual Maturity | | | | | | | | | |
|----------------------------------------------------------------------|--------------------------------|--|---------------------|---------------------|----------------|--|--|--|--|--|
| Class of Collateral Pledged | Open | | Up to 30 days | 31-90 days | Total | | | | | |
| Securities sold under
agreements to repurchase
U.S. treasuries | \$
— \$ | | 8,844,676,029
\$ | 1,675,894,924
\$ | 10,520,570,953 | | | | | |
| Total | \$
— \$ | | 8,844,676,029
\$ | 1,675,894,924
\$ | 10,520,570,953 | | | | | |
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The Company is required to post collateral with a market value equal to or in excess of the principal amount borrowed under repurchase agreements. To ensure that the market value of the underlying collateral remains sufficient, collateral is valued daily and the Company may be required to deposit additional collateral or may receive or return collateral pledged, when appropriate. Repurchase agreements are generally short term. The Company manages liquidity risks related to these agreements by sourcing funding from a diverse group of counterparties, providing a range of securities collateral.
### **(6) Related-Party Transactions**
In the normal course of business the Company engages in transactions with SMFG, SMBC and affiliated companies including SMBC-Nikko, SMBC, SMBC New York Branch (SMBC-NY), SMBC Cayman Branch (SMBC-CIB), SMBC Capital Markets, Inc. (SMBC-CM), Manhattan Asset Funding Company LLC (MAF), Nikko Systems Solutions (NKSOL), SMBC Nikko Securities Hong Kong, Ltd. (Nikko-HK), SMBC Nikko Capital Markets Europe GmbH (SMBC-Frankfurt) and SMBC Nikko Capital Markets Limited (SMBC-LTD). The nature of these relationships and a description of the transactions are disclosed below and throughout the notes.
The related-party transactions include but are not limited to collateralized transactions, loans, trade execution, underwriting referral services, and advisory services. The following amounts related to transactions with SMBC and affiliated companies are included in the accompanying consolidated statement of financial condition as of December 31, 2021:
## **Consolidated Statement of Financial Condition:**
| Assets: | |
|--------------------------------------------------------|---------------------|
| Securities purchased under agreements to resell, gross | \$
9,080,349,274 |
| Other assets | 3,815,174 |
| Total | \$
9,084,164,448 |
| | |
| Liabilities: | |
| Securities sold under repurchase agreements, gross | \$
572,922,126 |
| Subordinated debt | 225,000,000 |
| Total | \$
797,922,126 |
The Company enters into reverse repurchase and repurchase transactions with SMBC-Nikko, SMBC-CM and SMBC-LTD as part of ordinary course of business. Total repurchase transaction balances and repurchase transaction income and expense for the year then ended December 31, 2021 with SMBC-Nikko and SMBC-CM, on a gross basis before netting, are as follows:
| | SMBC-LTD | | SMBC-CM | | SMBC-Nikko | Total | |
|----------------------------------------------------|----------|------|-------------|--|---------------------|---------------|--|
| Securities purchased under
agreements to resell | \$ | — \$ | — \$ | | 9,080,349,274
\$ | 9,080,349,274 | |
| Securities sold under
repurchase agreements | | — | 261,355,752 | | 311,566,374 | 572,922,126 | |
The Company has pledged cash collateral to SMBC-NY to secure any unsecured extensions of credit pursuant to Section 23A and 23B of the Federal Reserve Act. At December 31, 2021, such amount was \$3,815,174, which is accounted as restricted cash, and the Company has earned interest during the year amounting to \$2,860.
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The Company has a \$225,000,000 subordinated loan agreement with SMBC-CIB which is approved regulatory capital by the FINRA.
The Company has variable interests as defined by FASB ASC 810-10 in an affiliated VIE in the form of fees earned for providing facilitation and origination services to that entity. The Company has no assets or liabilities reported in its consolidated statement of financial condition as of December 31, 2021 that relate to the Company's variable interest in that VIE and has no exposure to its losses. The Company is not the primary beneficiary of the VIE as defined by FASB ASC 810-10 as it does not have the power to direct the activities that most significantly impact the VIE's financial performance and has no obligations to absorb the VIE's losses. Such power and obligations are the responsibility of a related party. As such, the Company does not consolidate the accounts of the VIE in the consolidated statement of financial condition.
## **(7) Subordinated Borrowing and Other Financing**
The Company has a \$225,000,000 subordinated loan with SMBC-CIB. The loan has a scheduled maturity date of November 9, 2021 with an automatic extension of the scheduled maturity date by an additional year to November 9, 2022 unless SMBC-CIB notifies the Company before the day thirteen months preceding the current scheduled maturity date in writing that such maturity date shall not be extended. The loan bears interest at three-month SOFR plus 60 basis points. The subordinated loan has been approved as regulatory capital by the FINRA and constitutes part of the Company's net capital under the SEC Uniform Net Capital Rule 15c3-l (Rule 15c3-l), and may be repaid only if, after giving effect to such repayment, the Company meets the specified requirements of the SEC.
The Company has a committed and revolving line of credit with SMBC-CIB for \$1.6 billion. The committed revolving line is FINRA approved and has a credit period ending December 17, 2022 and maturity of December 17, 2023 with rollover provisions. Any borrowing will bear a market interest rate agreed upon by the Company and SMBC-CIB at the time of the advance. No amounts were outstanding under this facility as of December 31, 2021. The Company is obligated to pay a commitment fee on any unused amount of the revolving facility. The commitment fee payable was \$133,333 as of December 31, 2021.
On June 30, 2021, the Company renewed its uncommitted and revolving multicurrency credit line agreements with SMBC-CIB for \$3 billion and \$15 billion. The uncommitted facilities are subject to at a market interest rate to be determined by SMBC-CIB. As of December 31, 2021, there were no outstanding loan under the credit facilities. The uncommitted facilities were put in place to ensure that the Company has adequate funds to meet its short-term liquidity needs. The last draw down date on the facilities are June 30, 2022. The Company has additional uncommitted and revolving credit line agreement with SMBC AH for \$3 billion shared with other related parties, SMBC-CM, SMBC Leasing and Finance, Inc. and Manufacturers Bank. The Company and the related parties involved may borrow from time to time up to the last drawdown date, September 30, 2022, in an aggregate amount not to exceed at any time \$3 billion with a maturity period not exceeding 12 months. Each loan is subject to an applicable interest rate quoted by the lender at the drawdown date plus a margin rate ranging 0.05% to 0.12% based on the duration of the loan. The credit line, with SMBC AH, serves as a backstop facility to US subsidiaries, upon formation as a bank holding company (BHC). The Company has not yet used this facility as of the year ended December 31, 2021.
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### **(8) Stock Rights and Privileges**
Class A common stock, Class B common stock, and Class C common stock are identical in all respects and have equal rights and privileges, except as described in (c) below.
- (a) Dividend rights on all classes of common stock may be declared and paid only to the extent of the assets of the Company legally available for the payment of dividends. The declaration and payment of dividends on all classes of common stock is at the sole discretion of the Board of Directors of the Company.
- (b) Class dividends may be declared by the Board of Directors, in its sole discretion, payable exclusively to the holders of any of the respective classes of common stock, or to the holders of any or all such classes in equal or unequal amounts, notwithstanding the respective amounts available for dividends to each class, the respective voting and liquidation rights of each class, the amount of prior dividends declared on each class, or any other factor.
- (c) The voting rights of each share of the Company's Class A common stock entitles the holder to one hundred (100) votes on any matter on which stockholders of the Company are entitled to vote. Each share of the Company's Class B common stock entitles the holder to 0.5025126 votes on any matter on which stockholders of the Company are entitled to vote. Lastly, each share of the Company's Class C common stock entitles the holder to one (1) vote on any matter on which stockholders of the Company are entitled to vote.
### **(9) Leases**
The Company occupies office space under long-term sublease agreements with SMBC, which expires on various dates through 2037 for its allocable share of the annual rent payable by SMBC under its prime lease. The Company's leases do not include any residual value guarantees, and therefore none were considered in the calculation of the lease balances. The Company has leases with variable payments, most commonly in the form of common area maintenance charges which are based on actual costs incurred. These variable payments were excluded from the ROU asset and lease liability balances since they are not fixed or in-substance fixed payments. The present value of the lease payments is calculated using the incremental borrowing rate at the lease commencement date, which reflects the fixed rate the Company would have to pay to borrow an amount equal to the future minimum lease payments over a similar term.
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#### **SMBC NIKKO SECURITIES AMERICA, INC. AND SUBSIDIARY** (An Indirect Subsidiary of Sumitomo Mitsui Banking Corporation) **Notes to Consolidated Statement of Financial Condition December 31, 2021**
| | Minimum Future | | | |
|---------------------------------------|----------------|----------------|--|--|
| Remaining years | | Lease Payments | | |
| 2022 | | 3,832,060 | | |
| 2023 | | 3,218,038 | | |
| 2024 | | 2,932,384 | | |
| 2025 | | 2,906,416 | | |
| 2026 | | 2,906,416 | | |
| Thereafter | | 29,405,953 | | |
| Total lease payments | | 45,201,267 | | |
| Imputed interest | | (10,261,947) | | |
| Present value of lease payments | \$ | 34,939,320 | | |
| Weighted average remaining lease term | | 14.91 years | | |
| Weighted average discount rate | | 3.33% | | |
Future minimum operating lease payments under the sublease are summarized as follows:
### **(10) Commitments and Contingencies**
In the normal course of business, the Company enters into resale and repurchase agreements that settle at a future date. They are secured by U.S. treasury securities and corporate debt securities. These agreements do not meet the definition of a derivative, and therefore, are not recorded on the consolidated statement of financial condition until settlement date. At December 31, 2021, the Company had forward–starting collateralized agreements with start dates ranging from January 3, 2022 to January 6, 2022. The contract values of these transactions total \$815,938,024 for repurchase agreements and \$790,423,431 for reverse repurchase agreements as of December 31, 2021.
In the normal course of business, the Company enters into underwriting commitments. There was no open transaction relating to such underwriting commitments at December 31, 2021.
As a member of the Government Securities Division of the Fixed Income Clearing Corporation (FICC), the Company participates in the Capped Contingency Liquidity Facility (CCLF). CCLF is a commitment by FICC's solvent firms to enter into a repurchase agreement with FICC in the event a member firm fails, the funding to offset FICC's portfolio would be sourced across FICC's solvent members. As of December 31, 2021, the Company's commitment to the CCLF was \$42,347,164 of which no utilization had occurred. This amount is calculated by FICC based on membership size and volumes and is subject to fluctuation.
The Company is involved in litigation arising in the normal course of business from time to time. It is management's opinion that there are no matters pending, which are probable of having a material adverse effect on the financial condition of the Company.
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### **(11) Financial Instruments with Off-Balance-Sheet Risk and Concentration of Credit Risk**
In the normal course of business, the Company executes, settles, and finances securities transactions. These activities expose the Company to off-balance-sheet risk arising from the possibility that the counterparty may fail to satisfy its obligations. In these situations, the Company may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to counterparties.
The Company provides trading, financing, and related services to a diverse group of domestic counterparties, including corporations and institutional investors. In connection with these activities, the Company enters into collateralized reverse repurchase and repurchase agreements that may result in significant credit exposure in the event the counterparty to the transaction is unable to fulfill its contractual obligations. The Company minimizes credit risk associated with these activities by monitoring customer credit exposure and collateral values on a daily basis, and by requiring additional collateral to be deposited with or returned to the Company when deemed necessary.
### **(12) Net Capital Requirements**
The Company, as a registered broker dealer in securities, is subject to the net capital requirements of SEC Rule 15c3-l. Effective January 1, 2000, the Company elected the alternative method for calculating net capital. This requires the Company to maintain minimum net capital of \$250,000. As of December 31, 2021, the Company's net capital was \$1,250,651,685 which exceeded the required minimum by \$1,250,401,685.
### **(13) Income Taxes**
The Company accounts for income taxes in accordance with ASC 740. ASC 740 requires the recognition of tax benefits or expenses based on the estimated future tax effects of temporary differences between the consolidated financial statement and tax basis of its assets and liabilities. The Company's deferred income tax assets as of December 31, 2021 relate to tax basis differences on employee bonus accrual and depreciation. The Company evaluates its uncertain tax positions and the related tax reserves in accordance with the framework set out under ASC 740. ASC 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the amount of benefit that represents a greater than 50% likelihood of being realized upon ultimate settlement. As of December 31, 2021, the Company has no unrecognized tax benefits and has accrued no interest or penalties with respect to any tax positions taken
On February 6, 2019, the Company entered into Federal and state Tax Sharing Agreements with the Parent and each direct subsidiary of the Parent (members of the consolidated group). The effective date of the Tax Sharing Agreements is January 1, 2018. Consolidated Federal and, where applicable, state income tax returns for the year ended December 31, 2021 will be filed by the Parent. The current and deferred tax expenses for the consolidated group are allocated among the members of the group for their separate company financials statements using the separate return method. The separate return method applies ASC Topic 740 to the stand-alone statement of financial condition of each member of the consolidated group as if the group member were a separate taxpayer and a stand-alone entity. Calculations of current and deferred taxes consider all applicable income tax laws for the relevant tax jurisdiction. For states where consolidated tax returns are not required, each member of the consolidated group will continue to file separate tax returns and pay taxes directly to the relevant tax authorities.
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ASC 740-10-30-27 acknowledges that, under the separate return method, the sum of the amounts reported by individual members of the group may not equal the consolidated amount due to situations such as intercompany transactions between the subsidiaries of the Parent. Thus, if the tax sharing agreement differs from the chosen method of tax allocation under 740-10-30-27, the difference between the amount paid or received under the tax sharing agreement and the expected settlement amount based on the tax allocation method at the subsidiary level is treated as a dividend paid, or additional (paid-in) capital contribution. No such differences occurred in 2021.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company's net deferred tax assets as of December 31, 2021 are as follows:
| Employee bonus accrual | \$
12,282,504 |
|--------------------------|------------------|
| Foreign tax credit | 19,283 |
| Other | (262,857) |
| Depreciation | (1,700,791) |
| Deferred tax assets, net | \$
10,338,139 |
Although realization is not assured for the above net deferred tax assets, management believes it is more likely than not that they will be realized through future taxable earnings and, accordingly, has not recorded a valuation allowance as of December 31, 2021.
All years subsequent to and including 2018 for U.S. Federal, state and local tax audits remain open to examination by the taxing authorities. The Company is currently under various state tax audits including New York State and California for years 2015-2017 and 2017-2018, respectively.
## **(14) Employee Benefit Plans**
The Company participates in a defined benefit noncontributory retirement plan (Sumitomo Mitsui Banking Corporation Retirement Plan) and a defined contribution plan (Sumitomo Mitsui Banking Corporation 401(k) Plan) sponsored by SMBC. The plans cover all eligible local employees. The retirement plan costs are allocated to the Company based on actuarial computations. No separate determination has been made of the actuarial present value of accumulated benefits and the retirement plan's assets as they relate to the employees of the Company. Participants in the 401(k) plan may contribute amounts up to 50% of their eligible compensation, subject to certain limitations. The Company will match 401(k) contributions in an amount equal to the lesser of 100% of the first 3% contributed by the participant or 3% of total eligible compensation. Company's matching contributions gradually vest over the first five years of service.
### **(15) Subsequent Events**
Management has evaluated all subsequent events for the Company after the balance sheet date through February 28, 2022, and has concluded there are no events identified that require financial statement recognition or disclosure.
Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.