Coupland Cardiff Asset Management LLP Pillar 3 Disclosure and Policy
31 December 2016
The Pillar 3 disclosure of Coupland Cardiff Asset Management LLP (“CCAM”) is set out below as required by the Financial Conduct Authority’s “General Prudential Sourcebook” (GENPRU) and the “Prudential Sourcebook for Banks, Building Societies and Investment Firms” (BIPRU) specifically BIPRU 11. This follows the introduction of the Capital Requirements Directive (“CRD”) which represents the European Union’s application of the Basel Capital Accord. The regulatory aim of the disclosures is to improve market discipline.
As a ‘full-scope UK AIFM’ that also undertakes permitted additional MiFID type activities in addition to ‘managing an AIF’ CCAM falls within the definition of a ‘collective portfolio management investment firm’ (“CPMI”) and is a BIPRU firm (BIPRU 1.1.7A). As such, in addition to the IPRU(INV) 11 prudential sourcebook, the firm also has to comply with the prudential obligations contained in the GENPRU and BIPRU sourcebooks which together addresses both the firm’s capital requirements under the Alternative Investment Fund Management Directive (“AIFMD”) in ‘managing an AIF’ and under the Capital Requirements Directive (‘CRD’) in respect of the additional MiFID type activities (IPRU(INV) 11.6.1(1)). In the main, BIPRU only applies to a collective portfolio management firm such as CCAM in respect of its designated investment business excluding managing an AIF. An exception is Pillar 2 (the ICAAP, see below) which applies to the whole of CCAM’s business and Pillar 3 disclosure (see BIPRU 1.1.3).
Capital Requirements Directive overview
The Directive’s framework consists of three “Pillars”:
Pillar 1 – This prescribes the minimum capital requirements that authorised firms need to hold. This is the higher of the base capital requirement (€125,000); and the Fixed Overheads Requirement; or the sum of CCAM’s prescribed Credit Risk capital requirement plus the Market Risk capital requirement (in respect to designated investment business).
Pillar 2 – This requires firms to analyse the risks to the business and then consider whether the risks are mitigated to an appropriate standard. Where the firm considers that the risks are not adequately mitigated then capital should be allocated against those risks. Stress and scenario tests are conducted to ensure that the processes, strategies and systems are comprehensive and robust and that the allocation of capital is sufficient.
Pillar 3 - This requires firms to develop a set of disclosures which allow market participants to assess key information about the firm’s underlying risks, risk management controls and capital position.
This document is designed to meet the Pillar 3 obligations of CCAM by setting out the company’s risk management objectives and policies.
Alternative Investment Fund Manager Directive Overview
The AIFMD is a European Union directive that entered into force on 22 July 2013, with a 12 month transitional period allowing firms to comply with the directive by 22 July 2014. The AIFMD classifies certain investment vehicles, including investment companies, as Alternative Investment Funds (AIFs) and requires them to appoint an Alternative Investment Fund Manager (AIFM) to manage and oversee the operations of the investment vehicle. The Boards of the AIFs retain responsibility for strategy, operations and compliance and the Directors retain a fiduciary duty to shareholders.
For the purposes of AIFMD, CCAM is the appointed AIFM to the funds which are classified as AIFs under AIFMD.
CCAM is required to maintain own funds equal to the higher of:
- The fixed overhead requirement; or
- The funds under management requirement which is the base capital requirement of €125,000 plus 0.02 per cent of the amount by which the total value of funds under management exceeds €250 million (or equivalent), subject to a cap of €10 million (or equivalent). “Funds” in this context means AIFs and includes funds where a firm has delegated the management function but excludes funds that it is managing as a delegate.
In addition to the own funds requirements, AIFMs are also required to:
- Have additional own funds which are appropriate to cover potential liability risks arising from professional negligence. The amount of additional own funds that must be maintained is 0.01 per cent of the AUM of the AIFs being managed by the AIFM; or
- Hold professional indemnity insurance against liability arising from professional negligence which is appropriate to the risks covered. The coverage of such insurance for an individual claim must be equal to at least 0.7 per cent of the value of the portfolios of AIFs managed by the AIFM with the coverage of the insurance for claims in aggregate per year to be equal to at least 0.9 per cent of the value of the portfolios of AIFs managed by the AIFM.
CCAM is authorised and regulated by the Financial Conduct Authority and as such is subject to minimum regulatory capital requirements. It is an investment management firm and as such has no trading book exposures. It acts solely as investment manager, and does not hold client money.
CCAM is not required to prepare consolidated reporting for prudential purposes.
CCAM may omit information it deems as immaterial, in accordance with the rules. Materiality is based on the criterion that the omission or misstatement of any information would be likely to change or influence the decision of a reader relying on that information. Accordingly, where CCAM has considered an item to be immaterial it has not been disclosed.
In addition, if the required information is deemed to be proprietary or confidential then CCAM may take the decision to exclude it from the disclosure. In CCAM’s view, proprietary information is that which, if it were shared, would undermine its competitive position. Information is considered to be confidential where there are obligations binding CCAM to confidentiality with its customers, suppliers or counterparties. Where information is omitted for either of these reasons this is stated in the relevant section of the disclosure.
Frequency and location
CCAM makes Pillar 3 disclosures at least annually. The disclosures will be as at the Accounting Reference Date (“ARD”) and displayed on CCAM’s website.
The information contained in this document has not been audited by CCAM’s external auditors and does not constitute any form of financial statement.
2. Risk Management objectives and policies
The partnership is the Governing Body of CCAM and has management and oversight responsibility. It meets monthly and is composed of the partners of CCAM. The partnership is responsible for the process of risk management, as well as forming its own opinion on the effectiveness of this process. In addition, the partnership decides CCAM’s risk appetite or tolerance for risk and ensures that CCAM has implemented an effective, ongoing process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed.
General Risk Framework
Due to the size, nature, scale and complexity of CCAM, there is no independent risk management function. The Governing Body determines the business strategy and risk appetite along with the risk management policies and procedures. On an annual basis, risks to CCAM are formally identified and considered and CCAM’s resultant exposure is assessed after the application of both management and mitigation of those risks. Furthermore, CCAM then conduct a series of stress tests and scenario analyses on these risks to determine the effect they would have on the firm.
If necessary, CCAM would allocate extra capital to the relevant risk, as per the Pillar 2 requirement. This has not been deemed necessary to date.
The Governing Body meets on a regular monthly basis to discuss all key business issues including regulatory capital management and risk management. The Governing Body manages CCAM’s risks through a framework of policy and procedures having regard to relevant laws, standards, principles and rules (including Financial Conduct Authority principles and rules) with the aim to operate a defined and transparent risk management framework. These policies and procedures are updated as required, but are reviewed at least annually. The Internal Capital Adequacy Assessment Process (“ICAAP”) is an integral part of CCAM’s risk management framework. The ICAAP identifies the sources of risk to the firm and then rates the potential impact of each risk to the firm’s business, offsetting this against the systems and controls which have been put in place to mitigate against those risks. As part of this process, the Governing Body determines whether the amount of regulatory capital is adequate. The Governing Body undertakes an assessment at least annually of the ICAAP to ensure that the statement of risk appetite and the stress testing remain appropriate. This review is also undertaken whenever there is a material change to the business. Furthermore the Governing Body meets on a regular basis to discuss all key business issues including regulatory capital management and risk management.
CCAM’s greatest risks have been identified as:
Business risk – the most significant business risk faced by CCAM is that of a substantial and sustained reduction in funds under management, caused by adverse market conditions or investor redemptions, resulting in a loss of management fee income. Stress testing is conducted in order to assess and evaluate the ongoing potential impact of the various stress events on the performance of CCAM’s funds; and
Operational risk – This is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, including legal risk. CCAM’s management of operational risk is aimed at identifying risk in processes and improving existing controls, which include a number of policies and procedures, to reduce the likelihood of failure and the impact of losses.
In addition, the Governing Body has considered the following risks:
Credit Risk - CCAM’s main exposure to credit risk is the risk that management and performance fees cannot be collected. CCAM holds all cash and performance fee balances with banks assigned high credit ratings.
Market Risk - Market risk exposure has been assessed by CCAM and is limited to its exposure to any cash amounts held by CCAM in any currency other than Sterling.
CCAM’s Risk Framework
Risk within CCAM is managed by use of the following:
- CCAM has a conservative approach to risk;
- CCAM has in place an internal control framework to govern its processes and procedures and to mitigate any risks, made up of the following components:
- Statement of responsibilities;
- Risk appetite statement;
- Risk identification;
- Risk documentation;
- Scenario analyses and stress tests;
- Risk reporting.
- The risks identified by CCAM have been recorded in the ICAAP;
- The identified risks are reviewed at the monthly meetings of the Governing Body.
- CCAM has undertaken scenario Analysis and Stress Tests on the most significant risks identified. This informs CCAM how risks are likely to behave and what, if any, impact there is likely to be to our balance sheet;
Regulatory capital requirements
(1) Capital Required under the AIFMD
|i. Credit and Market Risk||273|
|ii. Fixed overheads requirement||661|
|Total Capital requirements (higher of i. or ii.)||661|
|Excess over requirement||1554|
(2) Capital required under the CRD
|i. Funds under management requirement||106|
|ii. Fixed overheads requirement||661|
|a) Higher of i. or ii.||661|
|b) Professional Indemnity Insurance requirement||404|
|Total Capital requirements (a+b)||701|
|Excess over requirement||1514|
CCAM is a Limited Liability Partnership and its capital arrangements are established in its Partnership deed.
Its capital resources for regulatory purposes is summarised as follows:
|Tier 1 capital less innovative tier 1 capital||2,215|
|Total tier 2, innovative tier 1 and tier 3 capital||0|
|Deductions from tier 1 and tier 2 capital||0|
|Total capital resources, net of deductions||2,215|