Pillar 3 Disclosures
Background
The following disclosure is made pursuant to Rule 11.3 of the FCA’s Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”). This requirement stems from the UK’s implementation of the third European Capital Requirements Directive (“CRD III”), which represented the European Union’s application of the Basel Capital Accord. While not formally subject to CRD III, the Firm is required to comply with UK regulations implementing CRD III.
The CRD has three pillars:
• Pillar 1 deals with minimum capital requirements.
• Pillar 2 deals with the Internal Capital Adequacy Assessment Process (“ICAAP”) undertaken by a firm and the Supervisory Review and Evaluation Process through which the Firm and Regulator satisfy themselves on the adequacy of capital held by the Firm in relation to the risks it faces.
• Pillar 3 deals with public disclosure of risk management policies, capital resources and capital requirements.
The Firm is incorporated in the UK and is authorised and regulated by the FCA as an alternative investment fund manager (“AIFM”) of non-EEA alternative investment funds (“AIFs”). The Firm is a collective portfolio management investment (“CPMI”) firm. As such, the Firm is authorised to undertake MiFID activities which give it the categorisation of a BIPRU firm without an investment firm consolidation waiver, deducting material holdings under GENPRU 2 Annex 4. As a CPMI firm, the Firm is subject to both the BIPRU requirements and the IPRU (INV) Chapter 11 requirements. The Firm acts solely as agent under a sub-advisory investment management agreement and therefore it does not hold any client monies or assets.
The key category of risk identified in the Firm’s ICAAP is business / operational risk. The Firm maintains an operational risk framework, described in further detail below, which is designed to mitigate such risks. Outsourcing arrangements in relation to key operational functions further reduce exposure to such risks.
The Firm regards information as material in disclosures if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions. Matters not deemed to be material may be omitted from this document.
The information contained in this document, which, unless otherwise specified, is given as at the most recent accounting reference date, has not been audited, does not constitute any form of financial statement and must not be relied upon in making any judgement or determination in respect of the Firm.
BIPRU 11.5.1
The Firm’s risk management objective is to develop systems and controls to mitigate risk to within its risk appetite. The Firm’s primary governing body is the board of directors. Meeting quarterly, the board of directors is responsible for and oversees the Firm’s risk management framework, assisted by the Firm’s risk committee. The board of directors determines the Firm’s risk appetite or tolerance for risk and ensures that the Firm has implemented an effective process to identify risks and ensure that they are appropriately managed. The risk committee is accountable to the board of directors for designing, implementing and monitoring a framework for risk management and implementing it into the day-to-day business activities of the Firm. Such framework includes the Firm’s statement of responsibilities, risk management objective, statement of risk appetite, risk register, stress tests and scenario analyses, event data collection and risk reporting.
BIPRU 3
For its Pillar 1 regulatory capital calculation of credit risk, under the credit risk capital component the Firm has adopted the standardised approach (BIPRU 3.4) and the simplified method of calculating risk weights (BIPRU 3.5). As a CPMI firm, the Firm is subject to both the BIPRU requirements and the IPRU (INV) Chapter 11 requirements. According to guidance in IPRU (INV) 11.6.4G, the Firm is permitted to exclude its AIF management business from its designated investment business for the calculation of its credit and market risk capital requirements (the Pillar II requirements). However, the Firm includes exposures relating to its investment management business in the following disclosure as a matter of good practice.
| Credit Risk Calculation | ||||
| Credit Risk Capital Requirement | Rule | Capital Component | ||
| Credit risk capital component | BIPRU 3.2 | £1,040,961 | ||
| Counterparty risk capital component | BIPRU 13 & 14 | £0 | ||
| Total | £1,040,961 | |||
| Rule | Exposure | Risk Weight | Risk weighted exposure amount | |
| National Government Bodies | BIPRU 3.4.2 | £407,924 | 0% | £0 |
| Banks etc long-term | BIPRU 3.4.36 | £0 | 50% | £0 |
| Banks etc short-term | BIPRU 3.4.39 | £4,468,665 | 20% | £893,733 |
| Exposure to Corporates/Debtors | BIPRU 3.4.52 | £11,793,552 | 100% | £11,793,552 |
| Past due item | BIPRU 3.4.96 | £0 | 100% | £0 |
| Fixed assets | BIPRU 3.4.127 | £324,722 | 100% | £324,722 |
| Accrued Investment management fees | BIPRU 3.4.128 | £0 | 100% | £0 |
| Total | £16,994,863 | £13,012,007 | ||
| Credit Risk Capital Component | 8% of risk weighted exposure | £1,040,961 | ||
BIPRU 4
The Firm does not adopt the internal ratings-based approach and hence this is not applicable.
BIPRU 7
The Firm has non-trading book potential exposure only (BIPRU 7.4, 7.5). Its market risk exposure is limited to foreign currency exposure. At the last accounting reference date, it had foreign currency exposure with a value of £9,883,513 giving rise to a market risk capital requirement of £790,681.
Overall Pillar 2 Rule
The Firm has adopted the structured approach to the calculation of its ICAAP capital resources requirement as outlined in the Committee of European Banking Supervisors Paper, 25 January 2006. The ICAAP assessment, including the Firm’s risk management framework and objective, is periodically reviewed by the board of directors and amended where necessary or when a material change to the business occurs.
BIPRU 11.5.8
The Firm’s main exposure to credit risk is the risk that management and performance fees cannot be collected. This risk is considered to be relatively low, particularly in respect of management fees, which are paid in advance. It holds all cash and fee balances with banks assigned high credit ratings. Consequently, risk of past due or impaired exposures is considered minimal. A financial asset is past due when a counterparty has failed to make a payment when contractually due. Impairment is defined as a reduction in the recoverable amount of a fixed asset or goodwill below its carrying amount.
BIPRU 11.5.12
The Firm has non-trading book potential exposure only (BIPRU 7.4 and BIPRU 7.5). As per GENPRU 2.1.46R, the market risk capital requirement is only required to be calculated in respect of designated investment business. This does not include the Firm’s activities as an AIFM. Accordingly, the Firm is primarily exposed to market risk in respect of its foreign currency holdings. Adopting the methodology specified under BIPRU 7.5.1, the Firm records a foreign currency position risk requirement (“PRR”) of £790,681. In respect of interest rates, equities, commodities, option positions and collective investment undertakings, its PRR is zero.
BIPRU 11.5.2
The Firm is not a member of a UK consolidation group and therefore does not report on a consolidated basis for accounting and prudential purposes.
BIPRU 11.5.3
The Firm is a BIPRU investment firm without an investment firm consolidation waiver deducting material holdings under GENPRU 2 Annex 4. As a CPMI firm, the Firm is subject to the capital requirements set out in IPRU (INV) Chapter 11 and also BIPRU/GENPRU. The Firm has the following capital resources:
|
Tier 1 Capital*/Initial Capital |
£10,591,150 |
|
Deductions |
£0 |
|
Tier 2 Capital |
£0 |
|
Deductions |
£0 |
|
Tier 1 + 2 Capital Resources |
£10,591,150 |
|
Tier 3 Capital |
£0 |
|
Total Capital (GENPRU) |
£10,591,150 |
*Tier 1 Capital comprises share capital and audited reserves, less interim net losses (if any).
BIPRU 11.5.5
The Firm has not adopted the internal ratings-based approach to credit risk and therefore is not affected by BIPRU 11.5.4R (3).
BIPRU 11.5.6
The Firm has not adopted the internal ratings-based approach to credit risk and therefore is not affected by BIPRU 11.5.4R (3).
BIPRU 11.5.7
The Firm does not have a trading book.
BIPRU 11.5.9
The Firm does not make value adjustments and provisions for impaired exposures that need to be disclosed under BIPRU 11.5.8R (9).
BIPRU 11.5.10
The Firm uses the simplified method of calculating risk weights (BIPRU 3.5).
BIPRU 11.5.11
The Firm has not adopted the internal ratings-based approach to credit and therefore is not affected by BIPRU 11.5.4R (3).
BIPRU 11.5.15
The Firm does not have a non-trading book exposure to equities.
BIPRU 11.5.16
Although the Firm has substantial cash balances on its balance sheet, there is currently no significant exposure to interest rate fluctuations in the non-trading book.
BIPRU 11.5.17
The Firm does not securitise its assets, act as sponsor or originator in relation to securitisation or hold on its balance sheet any securitised assets.
BIPRU 11.5.18
The Firm maintains a remuneration policy, which is designed to ensure compliance with the Remuneration Code as it applies to the Firm. It aims to establish and apply a remuneration framework under which the compensation of personnel is consistent with and promotes sound and effective risk management, does not encourage risk taking which is inconsistent with the risk profile of the Funds and is in line with the business strategy, objectives, values and interests of the Firm and the Funds. The Firm’s board of directors oversees the application of the remuneration policy. The Firm has elected to disapply the specific principles in the BIPRU Remuneration Code relating to deferral, form of delivery and performance adjustment and has elected not to set a maximum leverage ratio. In accordance with BIPRU 11.5.20(2), the Firm discloses Remuneration Code staff remuneration of £6,628,919 in respect of its investment management business, pursuant to BIPRU 11.5.18. Remuneration Code staff comprise those categories of staff whose professional activities have a material impact on the risk profiles of the Firm and the Funds. This includes senior management, risk takers, control functions, and employees receiving total remuneration that takes them into the same remuneration bracket as senior management and risk takers. Such disclosure is believed to be appropriate to the Firm’s size, internal organization and the nature, scope and complexity of its activities, having regard to, inter alia, privacy considerations and the protection of individuals’ personal data.