Nomura Holdings, a leading global investment bank, is investigating its India fixed-income operations amid concerns that reported profits in its rates division may have been inflated in recent years.
The review is being conducted by the bank’s compliance department and focuses specifically on how trades in Strips were valued, a Bloomberg report stated.
What Are Strips?
Strips, short for Separate Trading of Registered Interest and Principal of Securities, are bonds in which the principal and coupon (interest) payments are separated. Investors can buy and sell these components individually rather than as a single bond.
Strips have gained popularity among insurance companies because they allow cash flows to be structured in a way that shields them from interest rate fluctuations.
Strips is a niche but a fast-growing part of India’s bond market. Trading volumes in Strips jumped to ₹2.47 trillion ($28 billion) in the year ended March 31, more than six times higher than five years ago, according to clearing house data as stated in the Bloomberg report.
How Strips Can Affect Accounting
The compliance inquiry is centred on whether the trading desk marked positions to theoretical prices that did not reflect actual market liquidity.
If so, this could have artificially inflated gains, as Strips allow for the recording of unrealised profits on illiquid securities.
While Strips themselves are legitimate financial instruments, they require careful accounting to ensure that reported profits reflect real market conditions.
As per the report, this investigation began a month ago, with the compliance team scrutinising the valuation and accounting practices of the firm’s India unit.
Nomura has not yet commented on this development.
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