Nomura Holdings is reportedly investigating its India fixed-income business to ascertain whether profits were inflated in recent years. The probe was initiated by the bank's compliance department and is focused on the valuation of trades involving Strips.
What are Strips?
Strips, or Separate Trading of Registered Interest and Principal of Securities, are bonds where the principal and coupon payments are separated. This allows investors to buy and sell the individual components rather than the bond as a whole. These instruments have become increasingly popular among insurance companies seeking to shield their cash flows from interest rate fluctuations. Trading volumes in Strips have seen a significant increase, reaching ₹2.47 trillion ($28 billion) in the year ending March 31, which is more than six times higher than five years prior.
Why is Nomura investigating?
The central question of the investigation is whether the trading desk marked positions to theoretical prices that didn't accurately reflect market liquidity. If this occurred, it could have led to artificially inflated gains, as Strips allow for the recording of unrealized profits on illiquid securities. While Strips are legitimate financial instruments, their accounting requires careful attention to ensure reported profits align with actual market conditions.
Scope of the Investigation
Nomura's compliance unit began scrutinizing the valuation and accounting practices of the firm's local primary dealership about a month ago. Senior officials in the rates division have been asked to determine if profits were inflated. The review is particularly significant because Nomura is a key player in the Strips market, which is a growing segment of India's $1.3 trillion sovereign debt market.
STRIPS Market Concerns
The Nomura investigation highlights rising concerns about the Strips market, with some believing it has become a hotspot for accounting practices that overstate reported gains. In June, the Reserve Bank of India (RBI) permitted Strips trade for state government bonds.
Nomura has not yet commented on the investigation.
