The European Union’s Capital Requirements Directive (“CRD”) came into effect on 1 January 2007 and introduced a set of revised regulatory capital adequacy standards and associated supervisory framework across the European Union based on the Basel II Accord. The Basel II Accord comprises recommendations issued by the Basel Committee on Banking Supervision which aimed to create an international standard that banking regulators can use when creating regulations about the amount of capital banks need to put aside to guard against various financial and operational risks. The predecessor of the Financial Conduct Authority (the “FCA”) implemented the CRD in the United Kingdom.
The CRD uses the concept of three pillars that also form the basis of the Basel II Accord and extends the requirements to cover a wide range of financial institutions. These three pillars are also embedded in the FCA’s rules that implement the CRD.
Pillar 1 specifies the minimum capital resources which PSC Eaglewood Europe LLP (the “firm”) is required to hold. For the firm this is the higher of the sum of its market and credit risk requirements and its fixed overhead requirement.
Pillar 2 sets out the review process to be used to determine whether additional capital should be held by the firm against any risks not adequately covered by Pillar 1. Under Pillar 2 the firm is required to analyse a wide range of risks to its business and then consider whether the mitigation in place to address these risks is sufficient or whether additional capital in excess of that available under Pillar 1 is required to provide a buffer against specific risks. This procedure forms part of the firm’s Internal Capital Adequacy Assessment Process (“ICAAP”) which is performed at least annually.
Pillar 3 requires the firm to develop a set of disclosures which enable market participants to assess information on the risks facing the firm, its capital resources and risk management procedures.
PSC Eaglewood Europe LLP is an investment management firm providing services to a listed fund. PSC Eaglewood Europe LLP is authorised and regulated by the Financial Conduct Authority. Its FCA Part IV permission does not allow it to hold client money nor may it deal in investments as principal.
The firm’s approach to risk management is predicated on the need to manage the full range of risks facing the firm including operational, business, liquidity, credit and market risks including those that may arise as a result of its affiliation with a company in the US. The firm’s overriding aim in this area is to minimise the risks to the firm’s clients, its counterparties and other stakeholders and to ensure it remains in full compliance with regulatory and legal requirements.
The firm’s risk management framework incorporates an analysis of the impact of each material risk on the business, the probability of each risk occurring and the procedures in place in mitigation. This risk management framework is a core component of the firm’s high level systems and controls arrangements and ensures all areas of the business are subject to oversight.
The firm has employed guidelines for each risk type set out in the FCA Handbook of Rules and Guidance in order to evaluate each of the major risks it faces having regard to the relevance of each such risk type to it and its business. The firm has a low overall risk appetite with a maximum level of “medium” for certain risks. Where specific risks are determined as outside the risk parameters acceptable to the firm, enhanced controls and monitoring (which may include more frequent monitoring) have been designed and implemented in order to bring such risks within the firm's risk appetite.
Credit risk represents the risk that the firm is unable to realise the value of its assets and is calculated under FCA rules as 8% of the aggregated sum fully covered under Pillar 1.
The firm’s market risk is limited to exposure to foreign exchange fluctuations as a result of certain assets and liabilities being denominated in currencies other than sterling. The firm’s exposure to currency risk is actively controlled through sales of foreign exchange and/or the adoption of hedging strategies.
Operational risk is defined by the firm as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. The firm’s risk management framework emphasises operational risk and its senior management reviews all aspects of the business on a regular basis to ensure operational risks have been identified and effective controls put in place to mitigate the risks identified so the combination of the impact assessment and probability of each risk is kept to an acceptable level.
The risk management framework is supported by a wide range of real-time management information systems that monitor performance against key performance indicators. The firm has embedded within its business processes, at all levels, risk management processes that are subject to regular appraisal. These appraisals are supported and enhanced by independent and risk orientated monitoring procedures, the output from which is communicated through the regulatory framework via regular reports.
Business risk is the risk of loss inherent in the firm’s operating, business and industry environment. Business risks remain under regular review given macro-economic, geopolitical and industry uncertainties.
Liquidity risk represents the risk that the firm either does not have available sufficient financial resources to enable it to meet its obligations as they fall due or the firm is not able to secure such resources on reasonable terms. The risks attendant to the firm’s involvement with other entities with which it is associated are closely monitored. The firm maintains sufficient surplus cash to meet its working and regulatory capital needs, in addition to being in excess of the amount needed to fund an orderly and immediate wind-down of the firm’s regulated activities, should that become necessary. The risk that the business will be unable to meet its financial obligations as they fall due is not considered material for the purposes of this disclosure.
The firm’s capital resources are comprised of tier 1 capital. Tier 1 consists of share premium.
The main features of the firm’s resources as at 28 February 2017 are as follows:
|Tier 1 capital||3,594|
|Total tier 2 and tier 3 capital||0|
|Deductions from tier 1 and tier 2 capital||0|
|Total capital resources, net of deductions||3,594|
As at 28 February 2017, 3016 of retained losses were included in tier 1 capital. The fixed overheads requirement has been determined as the capital required to be held under Pillar 1.
Capital required under Pillar 2 is the sum of the capital required under Pillar 1 plus any additional capital required to be maintained against risks not adequately covered by Pillar 1 capital. The firm’s overall approach to assessing the adequacy of its internal capital is set out in its ICAAP. The ICAAP involves consideration of a range of risks faced by the firm and determines the level of capital needed to cover these risks. The level of capital required by the firm to cover identified risks is a function of their impact and probability and risk mitigation controls in place. The firm believes it has taken a prudent approach to its Pillar 2 calculations and that both its capital resources and their solvency are sufficient to meet the firm’s operational and other risk requirements and that these capital resources are also adequate to support its operations without any need for additional injections of capital over the period considered within the business plan forecasts contained within the ICAAP. Stress and scenario tests performed during the ICAAP support the firm's view that it holds adequate additional capital under Pillar 2.
PSC Eaglewood Europe LLP has completed this section of the Pillar 3 disclosure document on the basis that it is a full scope AIFM BIPRU (i.e. Collective Portfolio Management Investment “CPMI”) firm that is subject to the remuneration rules set out in SYSC 19B and SYSC 19C and is eligible to apply principles of proportionality. Under SYSC 19C1.1A, PSC Eaglewood Europe LLP is only required to demonstrate compliance with SYSC 19B. This disclosure relates to the 12 month period ended 28 February 2017.
The remuneration policy is the responsibility of the Remuneration Committee of PSC Eaglewood Ltd. The Remuneration Committee oversees the remuneration governance framework and ensures that remuneration arrangements are consistent with, and promote, effective risk management.
The Remuneration Committee considers remuneration in the context of a wider agenda including retention, recruitment, motivation and talent development and the external market environment. It also receives updates on regulatory developments and general remuneration issues, as well as market and benchmarking data.
The Remuneration Committee sets and monitors the remuneration policy standards and monitors compliance with them. Members of the Remuneration Committee determine the amount and composition of the total remuneration paid under this policy with additional input provided by the compliance, human resources and finance functions.
The components of total remuneration (which comprise base salary, variable bonus and benefits) are considered and are balanced appropriately having regard to the role fulfilled by each particular individual.
Firm, business area and individual performance are the significant contributors to the determination of variable bonus awards. The principal objective in determining variable bonus awards is to reward individual performance whilst ensuring that such payments are warranted given business results. In this context performance can include financial and non-financial measures, risk measures and other relevant factors. There is a focus on differentiation so that any rewards are determined according to the contribution of individuals and teams. Bonus pools and individual awards are subject to the governance of the Remuneration Committee and it is possible that in any year no variable bonus will be awarded.
The payment of a significant proportion of the performance award for those in receipt of a variable compensation award above a level set at the discretion of the Remuneration Committee may be required to be deferred and the sum involved invested in funds managed by the firm which vest at a future point in time. The purpose of these deferral arrangements with respect to certain individuals is to support a performance culture where employees recognise the importance of sustainable (and sustained) firm and individual performance. This arrangement encourages sound risk management whilst aligning the longer-term interests of participants with those of investors.
PSC Eaglewood Europe LLP only has one "business area", namely its asset management business. All of the firm’s relevant staff fall into the "senior management" category (in accordance with applicable FCA guidance, the firm does not have any "risk takers").
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 should not be relied upon in making any judgement on the firm. The risks identified in this disclosure may not include all of the risks the firm faces. Reliance should not be placed on these disclosures as to the effectiveness or otherwise of the firm’s internal control environment.