The 2006 Capital Requirements Directive ('the Directive') of the European Union created a revised regulatory capital framework across Europe based on the provisions of the Basel 2 Capital Accord. This was implemented in the United Kingdom through changes to the Financial Conduct Authority ('FCA') Handbook of Rules and Guidance, and specifically through the creation of the General Prudential Sourcebook ('GENPRU') and the Prudential Sourcebook for Banks, Building Societies and Investment Firms ('BIPRU').
The new framework consists of three 'pillars':
BIPRU requires that a firm subject to the provisions of the Directive must disclose, as appropriate, the relevant information required under Pillar 3.
Enshrined in the European remuneration provisions is the principle of proportionality. The FCA has sought to apply proportionality in the first instance by instituting two tests. Firstly, a firm that is significant in terms of its size must disclose quantitative information referred to in BIPRU 11.5.18R at the level of senior personnel. Secondly, that a firm must make disclosure that is appropriate to the size, internal organisation and the nature, scope and complexity of their activities.
The firm is not ‘significant’ (that is to say has relevant total assets <£50bn) and so makes this disclosure in accordance with the second test (BIPRU 11.5.20R(2)).
In this document we disclose information in accordance with the following BIPRU11.5 rules unless it is has been determined as immaterial or of a proprietary or confidential nature:
Scope and Application of Directive Requirements
The disclosures in this document are made in respect of Alchemy Special Opportunities LLP ('ASOP'), which is authorised and regulated by the United Kingdom's Financial Conduct Authority.
Risk Management Objectives and Policies
Our risk management policy reflects the FCA requirement that we must manage a number of different categories of risk. These include: operational, market, investment, credit, insurance, liquidity and group risk. In respect of this disclosure it is the first three of these risks that are relevant; however, further information on all these risks is set out below.
Insurance, Liquidity and Group Risk
In practice, ASOP has no significant insurance risk (policies are underwritten by highly rated counterparties) and very little liquidity or group risk. These three risks are not considered material for the purposes of this disclosure.
ASOP does not provide credit to clients so we are not subject to significant credit risk. With regard to bank deposits, we only deposit money with approved counterparties on agreed terms. As mentioned above, insurance counterparty credit risk is assessed before policies are renewed. For trade debtors, balances are continually monitored and chased where appropriate. Should uncertainty be raised about a counterparty's creditworthiness then the CFO may look to withdraw credit.
Most of our risk management efforts are focused on operational risk. This encompasses everything, from the risk of ensuring regulatory compliance to the risk of administrative errors. Our policy is to operate a robust and effective risk management process, embedded within the governance and management structure of our business. The CFO reports on Risk Management at the quarterly partners meetings and a formal annual risk review is also conducted as part of the Capital Adequacy assessment. Potential and actual operational risks are identified and controls put in place to mitigate them. Operational risk is formally reported to the partners half-yearly.
Under Pillar 1, our market risk is limited to our exposure to small foreign exchange fluctuations, due to some assets and liabilities being denominated in currencies other than sterling. Under Pillar 2, we have also considered changes in the market rate terms and conditions of investments made into funds which the group advises or manages, although variation of these is thought unlikely.
Our Pillar 2 investment risk assessment principally takes the form of a significant fall in the level of assets which ASOP advises, following poor investment performance. The effect of this decline would be to lead to lower advisory fee income and profitability. To mitigate our investment risk, ASOP looks to hire only the highest quality investment staff and adheres to strict investment processes to ensure that sufficient due diligence is undertaken pre-acquisition and that there is a structured programme of ongoing monitoring.
The value of retained reserves, members' and regulatory capital is £1.0m at 1 July 2016. Our capital resources comprise of core Tier 1 capital only and therefore there are no other items or deductions.
In accordance with GENPRU 2.1.45R (calculation of variable capital requirement for a BIPRU firm), our capital requirement has been determined as being our fixed overhead requirement and not the sum of our credit risk capital requirement and our market risk capital requirement. Our Pillar 1 fixed overhead requirement, based on audited prior year expenses adjusted for any forecast material changes, has been calculated as being £890K for the year to 30 June 2017. The forecast expenditure and the resulting capital requirement are monitored on a monthly basis by the CFO and on a quarterly basis by the partners.
Compliance with Rules in BIPRU and Pillar 2 Rule Requirements
Our overall approach to assessing the adequacy of our internal capital is set out in our Internal Capital Adequacy Assessment Process (ICAAP).
The ICAAP process involves separate consideration of risks to our capital combined with stress testing using scenario analysis to model changes in our income and expenses caused by various potential risks over a three year time horizon.
We will increase the level of regulatory capital contributions from the members as required over the coming years to ensure that we maintain the minimum regulatory capital requirement.
Compliance with the Remuneration Code
Disclosure of the aggregate remuneration for staff permits firms to take account of the provisions of the Data Protection Directive (Directive 95/46/EC) regarding the protection of individuals in relation to the processing of personal data.
Given the size and nature of the firm, it is deemed appropriate for the members to determine and implement the firm's Remuneration Policy rather than a separate Remuneration Committee.
The nature of compensation in the private equity industry, as agreed bilaterally with investors in the funds managed by the firm, ensures alignment of interest and a clear link between pay and performance.
There are currently only five code staff and consequently due to the small number the Partners have relied upon BIPRU 11.5.20R (2) and deemed that it is inappropriate to disclose their aggregate remuneration.
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