FSA Pillar 3 Disclosure
23 December 2009
Introduction
Regulatory Context
Indicus Advisors LLP (“lndicus”, “the Firm”) is incorporated in the UK and authorised and regulated by the Financial Services Authority (“FSA”). As such, the Firm has to comply with (i) the General Prudential Sourcebook (“GENPRU”) and (ii) the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”). This follows the introduction of the Capital Requirements Directive (“CRD”) which represents the European Union’s application of the Basel Capital Accord. BIPRU 11.3.3 R requires Authorised Firms to publish certain details of their risks, capital and risk management in order to improve transparency and market discipline.
Frequency
The Firm will be making Pillar 3 disclosures annually on its website. The Accounting Reference Date of Indicus Advisors is 31 March.
Verification
The information contained in this document has not been audited by the firm's external auditors and does not constitute any form of financial statement and must not be relied upon in making any judgement on Indicus Advisors LLP or any of its affiliates or subsidiaries.
Capital Requirement and Pillars I, 2 and 3
The FSA classifies Indicus as a BIPRU Limited Licence 50k Firm. The 50k refers to a base capital requirement of €50k. In order to meet the Basel II Pillar 1 minimum capital requirement, Indicus must maintain capital resources equal to or in excess of its Variable Capital Requirement. This is the higher of (i) the Fixed Overhead Requirement or (ii) the sum of the Credit Risk Capital and the Market Risk Capital Requirements. The capital used to meet the €50k base capital requirement can be used to meet any other elements of the capital resources requirement. As a BIPRU limited licence SOk firm there is no need to calculate an Operational Risk Capital Requirement for Pillar 1 purposes.
Basel Pillar 2 requires Indicus to ascertain whether it should hold additional capital against risks not covered in Pillar 1 such that Indicus can meet its liabilities as they fall due. As required by the FSA, Indicus has conducted a systematic Internal Capital Adequacy Assessment Process (“ICAAP”) to December 2009. In the event that this exercise were to produce a higher capital requirement than Pillar I requirement, Indicus would need to maintain this higher Pillar 2 requirement. However in the Firm’s case the results of the ICAAP show that the Pillar 2 requirement is not greater than that for Pillar I.
Basel Pillar 3 requires Indicus to disclose objectives and policies for each category of risk including strategies and processes to manage risks, risk management functional structure and arrangements, the scope and nature of risk reporting and measurement systems and policies for hedging and mitigating risks on a continuous basis. Indicus chooses to publish its Pillar 3 disclosure requirements on its website.
The Firm is subject to the disclosures under the Banking Consolidation Directive; however, it is not a member of a UK Consolidation Group and consequently, does not report on a consolidated basis for accounting and prudential purposes.
Governance Framework
The Board of Indicus Advisors LLP is the Governing Body of the Firm and has oversight responsibility. It meets at least quarterly and is composed of:
- Mr Ujjaval Yogesh Desai (Designated Member)
- Mr David Michael Reilly (Designated Member)
- Two individuals representing Cinven Debt Services No 1 LLP, which owns 50% of Indicus Advisors LLP
The Board is responsible for the entire process of risk management, as well as forming its own opinion on the effectiveness of the process. In addition, the Board determines the Firm's risk appetite or tolerance for risk and ensures that the Firm has implemented an effective, ongoing process to identify risks, to measure its potential impact and then to ensure that such risks are actively managed. The Designated Members together with senior management are accountable to the Board for designing, implementing and monitoring the process of risk management and implementing it into the day-to-day business activities of the Firm.
The ICAAP assessment is formally reviewed by the Board on an annual basis, and amended where necessary, or when a material change to the business occurs. The Designated Members/Finance Director presents the ICAAP document to the Board which reviews and endorses the risk management, at the same time as reviewing and signing off the ICAAP document.
Statement of Risk Appetite and Material Risk Definition
The Firm's risk appetite is determined and reviewed by the Board, and defined principally in accordance with its investment objectives of managing portfolios of non-investment grade bank loans that are at least 85% senior secured, and structured credit portfolios. Its operational objectives include maintaining a regulatory capital cushion significantly above the required minimum. The Firm has consistently met these objectives since FSA Authorisation and commencement of business activities in 2006.
The Firm's definition of a Material Risk is an unlikely but not impossible event that might result in a loss of capital greater than 5% of Tier 1 Capital.
Risk Management Objective
The Firm's general risk management objective is to develop systems and controls to mitigate risk to a level that does not require the allocation of Pillar 2 capital.
The Risk Framework and Identification Process
The Finance Director in consultation with other managers has identified the principal risk factors and categories of risks as applicable to Indicus. These risks are reviewed by the Designated Members who are also members of the Board. The Board of Indicus recognises that it has ultimate responsibility for overseeing risk management. The ICAAP Report and Pillar 3 disclosure are presented to the Board for approval on an annual basis unless events warrant an interim exercise.
Risk Assessment
Indicus has identified the significant risk types which have then been assigned High, Medium or Low weights according to perceived impact on the Firm, overall likelihood of occurrence and reference to the Firm's Risk Appetite and definition of Material Risks (see above). Risk Mitigation factors such as detective and preventative controls are then taken into consideration and a resulting risk score derived.
As of 23 December 2009 our capital resources were as follows:
Capital Resources
| Capital | 23/12/09 £'000 |
| Members Capital | 622 |
| Core Tier One Capital | 622 |
| Deductions from Tier One Capital | 0 |
| Total Capital Resources net of deductions | 622 |
| Fixed Overhead Capital Requirement | 417 |
| Credit Risk Capital Requirement | 114 |
| Market Risk Capital Requirement | 117 |
| Total Variable Capital Requirement | 417 |
| Surplus of Own Funds | 205 |
Significant and Material Risk
As of December 2009 Indicus is profitable and has liquid resources in excess of its capital.
Credit, Market, Operational and Business risks were systematically identified and risk scores derived. Indicus maintains comprehensive insurance policies. Data is backed up daily and kept offsite. The key market risk is that of currency fluctuation given that Indicus's fee income is mainly in Euros with some in US Dollars. With regard to business risk, stress testing was undertaken to assess the impact of reductions of 70% and 30% in our current CLO management fees. In both scenarios given current business plans, Indicus would continue to be profitable and would be able to meets its liabilities as they fell due.
Credit Risk (BIPRU 3 and also BIPRU 11.5.8 R)
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).
The Firm is primarily exposed to Credit Risk from the risk of non-collection of investment management fees. Once received cash is held with a reputable UK Clearing Bank assigned high credit ratings.
| Rule | Exposure | Risk Weight |
Credit Risk Capital Component |
|
| £’000 | £’000 | |||
| National Government Bodies | BIPRU 3.4.2 | 0 | 0% | 0 |
| Banks etc long-term | BIPRU 3.4.36 | 0 | 50% | 0 |
| Banks etc short-term | BIPRU 3.4.39 | 1,565 | 20% | 25 |
| Exposure to Corporates/Debtors | BIPRU 3.4.52 | 0 | 100% | 0 |
| Past due item | BIPRU 3.4.96 | 0 | 100% | 0 |
| Other items | BIPRU 3.4.126 | 235 | 100% | 19 |
| Fixed assets | BIPRU 3.4.127 | 0 | 100% | 0 |
| Accrued Investment management fees | BIPRU 3.4.128 | 879 | 100% | 70 |
| Total | 2,679 | 114 |
Internal Ratings (BIPRU 4)
The Firm does not adopt the Internal Ratings Based approach and hence this is not applicable.
Operational Risk
The Firm's Fixed Overhead Requirement ("FOR") is disclosed as a proxy for the Pillar 1 Operational Risk Capital calculation. The Firm's Pillar 1 Capital Resources Requirement is the FOR which is the higher of FOR/the sum of Market Risk and Credit Risk Requirement.
Fixed Overhead Requirement GENPRU 2.1.53 £417k
The Firm has opted to manage its Operational Risks via two distinct approaches within its overall Pillar 2 risk framework:
(a) Key operational risks are specified within the Firm's Pillar 2 Risk framework, with details of any applicable mitigating actions and controls noted in each risk area or context. In the event that any specific residual (post-mitigation) risk is Material, the Firm will assign a corresponding level of capital to mitigate the risk factor. The Firm does not currently consider it necessary to allocate Pillar 2 Capital against its operational risks as identified.
(b) The Firm has undertaken an assessment of the minimum capital it would require to hold in the event that it might be required to wind up the business in an orderly fashion such that all liabilities could be met. In our opinion this would be no more than the Pillar I requirement.
Market Risk (BIPRU 7)
The Firm has Non-Trading Book potential exposure only in respect of foreign currency PRR (BIPRU 7.5) (£117k).
Interest Rate Risk (BIPRU 11.5.12)
The Firm currently has no significant exposure to Interest Rate fluctuations.
Concentration Risk (BIPRU 10)
The Firm closely monitors and assesses its Non-Trading Book limits in line with (BIPRU lO.5.2R to BIPRU 10.S.10R). When the Firm has a single exposure exceeding 25% of its capital resources, it is recorded in the Breaches Register, reported to the FSA and monitored until such time as is cleared upon receipt of fees. Also, the Firm monitors its position to ensure the sum of its exposures of more than 10% do not exceed 800% of its Regulatory Capital Resources.
No capital was considered necessary to be assigned, as mitigation reduced all these risk scores to low.
Securitisation
This disclosure is not required as the Firm does not securitise its assets.