Disclosure
AVOCA CAPITAL HOLDINGS
PILLAR THREE DISCLOSURES – JUNE 2010
Contents
1. Background
2. Definitions
3. Basis of Reporting
4. Risk Management
5. Identified Risks
6. Capital Requirements
1. Background
The Capital Requirements Directive, which came into effect on 1 January 2007, introduced a supervisory framework in the EU which reflects the Basel II rules on capital measurement and capital standards. The CRD applies to Avoca Capital Holdings (ACH) and replaces the predecessor Capital Adequacy Directive requirements. The new framework consists of three 'pillars'.
- Pillar 1 describes the calculation of regulatory capital for credit, operational and market risk i.e. the own funds requirement
- Under Pillar 2, firms and supervisors have to take a view on whether a firm should hold additional capital against risks not covered in Pillar 1 and must take action accordingly. Under Pillar 2 ACH must, amongst other things, regularly assess the amount of internal capital we consider adequate to cover all risks to which we are exposed and also take account of future needs based on our business strategy. The process is known as the Internal Capital Adequacy Assessment Process (ICAAP).
- The aim of pillar 3 is to allow market discipline to operate by requiring investment firms to publicly provide details of their risk management activities, risk rating processes and risk distributions.
This document constitutes the Pillar 3 disclosures for ACH.
The Pillar 3 disclosure requirements are set down in Regulation 37 of the European Communities (Capital Adequacy of Investment Firms) Regulations, 20061, which refers to Part 11 of the European Communities (Capital Adequacy of Credit Institutions) Regulations 2006 (the “CI Regulations”).2 CI Regulation 72 in turn refers to the disclosure requirements set out in Annex XII, Part 2 of EU Directive 2006/48/EC (the “Banking Consolidation Directive”).
It should be noted that the disclosure requirements are not absolute. CI Regulation 73 permits the non-disclosure of information where such information is proprietary, confidential or where it is not material. These terms are defined in Annex XII of the Banking Consolidation Directive.
ACH has not made disclosure of information where such information is proprietary, confidential or where it is not material.
1 Statutory Instrument No. 660 of 2006
2 Regulations 72‐76 of Statutory Instrument No. 661 of 2006
Definitions
1. Information shall be regarded as material in disclosures if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.
2. Information shall be regarded as proprietary to a firm if sharing that information with the public would undermine its competitive position. It may include information on products or systems which, if shared with competitors, would render a firm’s investments therein less valuable.
3. Information shall be regarded as confidential if there are obligations to customers or other counterparty relationships binding a firm to confidentiality.
Basis of reporting
ACH is the sole regulated entity in the Avoca group of companies and accordingly information is provided on a sub-consolidated basis as permitted under Article 72(1) of the Banking Consolidation Directive.
Risk Management
The Boards of ACH places a high priority on a strong risk management culture within the firm. The Board recognises that risk is inherent in the firm’s business and the markets in which it specialises. Effective risk management and strong internal controls are therefore central to the firm’s business model. The risk profile and internal control environment are characterised by:
- A clear definition of management and staff responsibilities, with reporting lines incorporating segregation of duties;
- Recruitment and training procedures to ensure that ACH recruits staff of appropriate calibre and background and that they have sufficient expertise to carry out their assigned tasks;
- Active and professionally staffed compliance and risk management functions;
- The encouragement of a culture of openness and mutual trust between colleagues;
- Well-developed credit management and investment appraisal functions requiring peer review and senior management sign-off;
- Regular written credit appraisal reporting and management reporting requirements;
- The provision of adequate insurance arrangements; and
- Ensuring that the firm has sufficient capital resources to meet and exceed its operational and regulatory capital needs.
| a) |
Market Risk: The risk to earnings and capital from adverse movements in asset prices / exchange rates on client investment holdings. The firm does not trade for own account and the majority of its fees are earned on a par-value basis rather than being subject to mark-to-market adjustments and are receivable in euros. |
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| b) |
Credit Risk: The unforeseen loss that might crystallize (and potentially impact capital) from a counter party failing to meet an agreed contractual obligation – including settlement risk Credit risk for ACH is minimal with assets being mostly cash and intercompany receivables. Further analysis is not disclosed due to confidentiality. |
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| c) |
Operational Risk: The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events ACH is conscious of the importance of its good name and reputation as it continues to develop and sell high-quality product into a specialised and well-informed segment of the institutional investor market. A strong risk management and internal control framework is consequently very important to ACH. The firm has a narrow range of operations to which tightly-focussed internal controls are applied. Investment opportunities are subject to detailed analysis by professionally qualified staff. Their reviews are subject to hierarchical assessment and peer review at credit committee. Investment opportunities are rigorously scheduled for review and the credit committee meets regularly to approve the regular investment decisions of the firm. Completed investments are subject to periodic review through the same assessment system Furthermore, the MiFID Regulations requires the firm to establish adequate policies and procedures sufficient to ensure compliance of the firm, its management and staff with the Regulations. |
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| d) |
Liquidity Risk: Financial risk due to uncertain liquidity (funding) The firm has a stable funding base and has no significant exposure to liquidity risk. |
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| e) |
Solvency Risk: Ability to service current outgoings The firm has a broad customer base providing well-defined cash flows. The firm has no significant exposure to solvency risk. |
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| f) |
Fund Performance Risk: The unforeseen loss that might crystallize (and potentially impact capital) from a loss or deferral of investment management fees (arising from a decline in the credit ratings or a default of the leveraged loans in our client portfolios). |
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| g) |
Securitisation Risk: The possibility that a securitization undertaken will be structured in a way that it fails to remove as much risk from the balance sheet as expected The firm does not securitise assets from its own balance sheet, but purchases them as an agent for client funds. |
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| h) |
Insurance Risk The board of directors does not regard the firm as having a material exposure to insurance risk. |
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| i) |
Concentration Risk: Any large (e.g. over 10% of capital / earnings) credit exposure to connected counter parties; product/ instrument type; sectors; countries or geographical area The firm sources its income from a number of clients, providing portfolio management services to a number of CLO funds. This gives rise to a degree of sectoral concentration among its client base. However, this concentration does not extend to asset transactions as the firm does not trade on own account. |
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| j) |
Reputation Risk The firm is managed by its shareholders and its operations are closely controlled by the board of directors. See operational risk above. |
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| k) |
Legal Risk: The risk arising from failure to comply with statutory or regulatory obligations ACH has developed extensive internal control procedures which are set out in the Operational Compliance Manual, copies of which are issued to all staff. This manual sets out the various conduct of business obligations impacting on the Firm and the procedures adopted to discharge them. |
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Capital Requirements
The firm has calculated its Pillar 1 capital requirements under relevant legislation. The firm has also established an Internal Capital Adequacy Assessment Process to calculate its Pillar 2 requirements. This process is reviewed and updated annually or when there is a material change in the nature of the firm’s activities.
The board of directors consider that this provides a sound, effective and complete strategy and process to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of the risks to which the firm is or might be exposed. This strategy and process is subject to regular internal review to ensure that it remains comprehensive and proportionate to the nature, scale and complexity of the activities of the firm.
At 31 December 2009 the firm calculated that it had a CRD Minimum Regulatory Capital requirement (the higher of Pillar 1 and Pillar 2 requirements) of €1,927,377. The firm maintains own funds in excess of this requirement. The firm utilises the Basic Indicator Approach to satisfy the Minimum Own Funds Requirements for Operational Risk regulations.
The firm regards information regarding its exposure to reputational risk, operational risk, and fund performance risk to be proprietary information.
The firm does not regard other exposures as being material for disclosure.
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