Risk Control System

Keeping risk that affects our management within a permissible range helps us achieve our business goals. Based on this approach, we appropriately identify, analyze, and evaluate the risks stablished in the “Rules of integrated risk control” and have devised appropriate control systems for the different risks that confront the Monex Group and the group companies.

 

As per the flow chart below, the CEO appoints a risk control manager, and this manager is responsible for ascertaining the development and operational status related to the risk control system and regularly reporting that status to the Board of Directors.

Risk Management System

Risk Definitions and Main Measures

The Monex Group categorizes and regularly assesses the following types of risks noted in the table below. In addition, the main measures to address those risks are also shown.(As of end-December 2023)

 

Risk Category1 Risk Category2* Risk Definition Main Measure
Business Risks Strategic Risk Risk of losing a competitive edge in an existing business or in delaying the launch of a new business, etc. Japan segment aims to increase new account acquisitions and increase market share by reducing Japanese stock trading fees. U.S. segment and Crypto Asset segment will aggressively make upfront investments to achieve further growth, and the two segments have announced of listing plan on the U.S. market.
Business Management Risk Risk of losing profitability across entire group due to poor performance and cost management by the Monex Group Monthly Report performance and KPIs per segment to the Board, etc.
Market-related Risk Market-related Risk Risk of losses from fluctuation in assets held (including off-balance sheet assets) due to changes in market risk factors Control risk weight on FX positions appropriately based on cover transaction rules. (The company does not hold positions on crypto assets.) Measure the risk amount through VaR calculation.
Credit Risk Credit Risk Credit risk caused by business partners and customers (including credit risk that business partners exposed to climate change risk) Identify risk like an imbalance of positions by regularly monitoring the trading direction.
Measure the risk amount through VaR calculation
Liquidity Risk Liquidity Risk Risk of having difficulty securing funds due to poor funding management Diversify funding means including the use of direct and indirect financing
Information Security Risk Information Security Risk Risk of losses if the confidentiality or completeness of information is compromised due to leaking or damage of information assets Regularly monitor information and constantly provide security training for employees
System Risk Cybersecurity Risk Risk of losses due to important information being leaked or unauthorized use of systems from cyber attacks, or due to service stoppage Create global system and promote security measures in the organization’s operations, system support, personnel support and external partnerships.
Measure the risk amount through VaR calculation on wallet balances in crypto transactions
System Architecture Risk Risk of losses to customers and Monex Group due to system being down, system malfunction and/or unauthorized system use Use a third party to regularly monitor for vulnerabilities. Immediate response to vulnerability detection
Administrative Risk Administrative Risk Administrative risk of human error committed by an employee or from relying on a third party (clearing agency or system vendor, etc.) Review risks in main work tasks related to new projects and product services, and create and use documents, procedures and other forms of explicit knowledge
Legal risk Risk of Money Laundering and Funding Terrorism Risk of being used for money laundering and funding terrorism Ensure all group companies implement countermeasures, and use our global reporting system to identify issues related to AML measures and address accordingly
Compliance Risk Risk of penalties, litigation or other repercussions due to a lapse in compliance with internal or external laws and regulations, or risk of losses due to breach of contract Ensure compliance manager provides regular updates about compliance with rules and regulations, and create check system for issues related to concluding contracts
Reputation Risk Reputation Risk Risk of loss due to reputational damage to the company caused by media reports, rumors, etc. (including loss caused by delayed response to environmental problems that leads to deterioration of company reputation, and decrease in customer transactions, etc. ) Strengthen relationships with media representatives and PR firms, and work to minimize risk of reputational damage from bad rumors.
Actively disclose information on climate change response efforts of the company
Disaster Risk Natural Disaster Risk Risk of natural disaster stopping business operations(including risk of asset damage due to business stagnation caused by business partners from natural disasters) Establish business continuity plans and review emergency plans ahead of time at Monex Group’s main locations in the event of a natural disaster or terrorist attack
Other Risks Risk Related to Organization Risk of low morale in organization hindering performance to reach business goals Organize town hall meetings in main segment. Disclosure of CEO's Q&A session at online financial results briefing meetings for individual investors.
Constantly inform the established whistleblower hotline system for all the group employees.
Information Disclosure Risk Risk of illegal accounting practices or unauthorized disclosure of IR information In addition to establishing and operating appropriate internal controls, liaise with outside directors with accounting qualifications and/or work with accounting auditors to create system to prevent illegal accounting practices.
Preliminary check of press releases such as timely disclosure by the Information Disclosure Committee
Other Country, political and government risk Share information about global operating conditions by holding meetings with management teams from different global locations

*Risk calculation for any remaining risks that correspond to category2 risks above
(Level of impact across group × Rate occurrence/Control measures)

Risk Control in Crypto Asset Business Segment

Differences in risk control between a financial instruments business and cryptocurrency exchange business

The risk control as a cryptocurrency exchange service provider is similar to the risk control in FX trading in some aspects. For example, a cover transaction (hedging on a position held by a virtual currency exchange service provider to reduce risk with another service provider) for a position that is issued by trading a cryptocurrency with a customer is the same as a cover transaction for a foreign currency pair in FX trading.

 

However, the cryptocurrency exchange service provider has a higher liquidity risk for the cover transaction than in FX trading. For leverage, the risk (absolute amount of loss) to the trading volume is lower because Coincheck, for example, has a leverage ratio of 5x, which is smaller than the 25x upper limit in FX trading.

 

On the other hand, there is a noteworthy difference in managing cryptocurrency trading and FX trading, which is handling the currency in a wallet form and using blockchain to complete the transaction. When compared to a brokerage firm that primarily engages in equities trading, the stock as the primary element in that trading is managed by Japan Securities Depository Center, Inc. using electronic data. In simpler terms, the data is stored at a separate location from the brokerage firm. Whereas with a cryptocurrency exchange service provider, the cryptocurrencies are most often stored by the company itself, requiring the company to control that high risk.

Management required in the cryptocurrency exchange business

In a cryptocurrency exchange business, other  aspects need to be managed apart from the  aforementioned risk control. Even with regard  to money laundering prevention, there are more points that must be monitored in a cryptocurrency  exchange business. In a brokerage firm, the  deposit and withdrawal from a securities account  can only be completed via a bank account.
These deposits and withdrawals are not possible  if the names on the accounts do not match. Yet in the cryptocurrency exchange business, more  advanced measures to prevent money laundering  are needed because a cryptocurrency can be  remitted to a cryptocurrency address.　

 

In terms of system security measures, we are  making our security system stronger to conduct  appropriate monitoring, assuming there will be  multiple threats, such as hackers attempting to  attack our servers.

Differences between cryptocurrency exchange business and financial instruments business

Service content Cover
transaction		 Liquidity risk Verification of person
depositing or withdrawing		 Outflow risk
of assets in
custody		 Comprehensive
risk control
Cryptocurrency
exchange service
provider		 Trade location and
exchange location		 ○ High Bank account/
address		 High High
Financial instruments
business		 Equities trading - - Bank account Low Low
FX trading ○ Low Bank account Low Medium