PILLAR 3 MINIMUM DISCLOSURE REQUIREMENTS
The Capital Requirements Directive (‘the Directive’) of the European Union establishes a revised regulatory capital framework across Europe governing the amount and nature of capital credit institutions and investment firms must maintain. In the United Kingdom, the Directive has been implemented by the Financial Conduct Authority (‘FCA’) in its regulations through the General Prudential Sourcebook (‘GENPRU’) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU’).
The FCA framework consists of three ‘Pillars’:
•Pillar 1 sets out the minimum capital amount that meets the firm’s credit, market and operational risk;
•Pillar 2 requires the firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FCA; and
•Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position.
The rules in BIPRU 11 set out the provision for Pillar 3 disclosure. This disclosure is designed to meet our Pillar 3 obligations.
The Pillar 3 disclosure document has been prepared by Marwyn Investment Management LLP (“The Firm”) in accordance with the requirements of BIPRU 11 and is verified by its partners (“the Principals”). Unless otherwise stated, all figures are as at the financial year-end.
Pillar 3 disclosures will be issued on an annual basis after the year end and published as soon as practical with the annual accounts.
We are permitted to omit required disclosures if we believe that the information is immaterial such that omission would be unlikely to change or influence the decision of a reader relying on that information.
In addition, we may omit required disclosures where we believe that the information is regarded as proprietary or confidential. In our view, proprietary information is that which, if it were shared, would undermine our competitive position. Information is considered to be confidential where there are obligations binding us to confidentiality with our customers, suppliers and counterparties.
We have made no omissions on the grounds that it is immaterial, proprietary or confidential.
Scope and application of the requirements
Marwyn Investment Management LLP (“the Firm”) is authorised and regulated by the Financial Conduct Authority and as such is subject to minimum regulatory capital requirements. The Firm is categorised as a limited licence firm by the FCA for capital purposes. It is an investment management firm and as such has no trading book exposures.
Although part of a group, the Firm is managed on a “stand-alone” for liquidity purposes and we do not foresee any impediments to the prompt transfer of capital between group entities should the need arise. There are no differences in the basis of consolidation for accounting and prudential purposes.
This section explains the risk management objective and policies for each separate category of risk including:
Strategies and processes to manage risks;
Structure and organisation of risk management function;
Scope and nature of risk reporting and measurement systems; and
Policies for hedging and mitigating risk.
The Firm is governed by its Principals who determine its business strategy and risk appetite. They are also responsible for establishing and maintaining the Firm’s governance arrangements along with designing and implementing a risk management framework that recognises the risks that the business faces.
The Principals also determine how the risks our business faces may be mitigated and assess on an ongoing basis the arrangements to manage those risks. The Principals meet on a regular basis and discuss current projections for profitability, cash flow, regulatory capital management, and business planning and risk management. The Principals manage the Firm’s risks business though a framework of policy and procedures having regard to relevant laws, standards, principles and rules (including FCA principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required.
The Principals have identified that business, operational, market and credit risks are the main areas of risk to which the Firm is exposed. Annually the Principals formally review their risks, controls and other risk mitigation arrangements and assess their effectiveness. Where the Principals identify material risks they consider the financial impact of these risks as part of our business planning and capital management and conclude whether the amount of regulatory capital is adequate.
The Firm is a Limited Liability Partnership and its capital arrangements are established in its Partnership deed. Its capital is summarised as follows:
The main features of the Firm’s capital resources for regulatory purposes are as follows:
Capital item £’000
Tier 1 capital less innovative tier 1 capital £499
Total tier 2, innovative tier 1 and tier 3 capital –
Deductions from tier 1 and tier 2 capital –
Total capital resources, net of deductions £499
Our Firm is small with a simple operational infrastructure. Its market risk is limited to foreign exchange risk on its accounts receivable in foreign currency, and credit risk from management and performance fees receivable from the funds under its management. The Firm follows the standardised approach to market risk and the simplified standard approach to credit risk. The Firm is subject to the Fixed Overhead Requirement and is not required to calculate an operational risk capital charge though it considers this as part of its process to identify the level of risk based capital required.
As discussed above the firm is a limited licence firm and as such its capital requirements are the greater of:
•Its base capital requirement of €50,000; or
•The sum of its market and credit risk requirements; or
•Its Fixed Overhead Requirement.
We have not identified credit risk exposure classes or the minimum capital requirements for market risk as we believe that they are immaterial.
It is the Firm’s experience that the Fixed Overhead Requirement establishes its capital requirements and hence market and credit risks are considered not to be material.
The Firm’s Pillar 1 capital requirement has been determined by reference to the Firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with the FCA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53. The requirement is based on the FOR since this exceeds the total of the credit and market risk capital requirements it faces and also exceeds its base capital requirement of €50,000.
The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff. The Firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year.
This is monitored by the Finance Director and reported to senior management on a monthly basis.