Introduction
The firm is required by the Financial Services Authority (“FSA”) to disclose information relating to the capital it holds and each material category of risk it faces in order to assist users of its accounts and to encourage market discipline. These disclosures aim to provide information on the risk exposures faced by the firm and the risk assessment process it has in place to monitor these. Known as “Pillar 3” disclosures, they are required to be made under Chapter 11 of the FSA’s Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”) and are seen as complementary to the firm’s minimum capital requirement calculation (“Pillar 1”) and the internal review of its capital adequacy (“Pillar 2”). These disclosures have all been prepared as at 31 December 2011.
Risk Management
The firm has established a risk management process in order to ensure that it has effective systems and controls in place to identify, monitor and manage risks arising in the business. As part of the SEB group, the firm is subject to a detailed risk review on an annual basis, most recently in December 2011. Whilst a number of issues were identified as part of the most recent risk review, the appropriate remedial action required does not involve the need for further capital to be injected. Where systems and controls are required to be enhanced, an action plan is put in place and open issues are expected to be dealt with.
The risk management process is overseen by the Compliance Officer, with the firm’s directors taking overall responsibility for this process. Management accounts demonstrating continued adequacy of the firm’s regulatory capital are also provided on a monthly basis.
Appropriate action is taken where risks are identified which fall outside of the firm’s risk tolerance levels or where the need for remedial action is required in respect of identified weaknesses in the firm’s mitigating controls.
Specific risks applicable to the firm come under the headings of business, operational, credit and market risks.
Business Risk
The firm’s revenue is reliant on the level of its assets under management and the performance of the existing funds under management. As such, the risk posed to the firm relates to underperformance resulting in a decline in revenue and ultimately the risk of redemptions from the funds managed by the firm. An analysis performed by the firm anticipates that the firm could withstand a substantial fall in assets and continue to meet all expenses from the significant levels of capital held by the firm.
Operational Risk
The firm places strong reliance on the operational procedures and controls that it has in place in order to mitigate risk and seeks to ensure that all personnel are aware of their responsibilities in this respect.
The firm has identified the key operational risks that need to be managed. Appropriate polices are in place to mitigate against these risks, which include having in place robust policies and procedures in areas where operational risks have been identified, ensuring appropriate staff training and maintaining adequate professional indemnity insurance.
Credit risk
The firm is exposed to credit risk in respect of investment management fees billed and cash held on deposit.
The number of credit exposures relating to the firm’s investment management clients is limited. Management fees are drawn monthly from the funds managed and performance fees are drawn annually where applicable. The firm considers that there is a low risk of default by its clients. All bank accounts are held with large international credit institutions.
The firm uses the simplified standardised approach detailed in BIPRU 3.5.5 of the FSA Handbook when calculating risk weighted exposures in respect of its debtors. This amounts to 8% of the total balance due. All bank balances are subject to a risk weighted exposure of 1.6% in accordance with BIPRU 3.4 of the FSA Handbook.
Market risk
The firm takes no market risk other than foreign exchange risk in respect of its accounts receivable and cash balances held in currencies other than GBP.
Hedging strategies may be used from time to time to mitigate against potential foreign exchange losses and these are monitored by the Chief Operating Officer. Losses arising on foreign exchange movements are monitored on a regular basis and reported to senior management via the monthly management accounts.
The firm calculates its foreign exchange risk by reference to the rules in BIPRU 7.5.1 of the FSA Handbook and applies an 8% risk factor to its foreign exchange exposure.
Capital adequacy
Capital resources
The firm maintains capital resources as follows:
| | 31 Dec 20011 (unaudited)
£000 |
|---|
| Tier 1 capital* | 3,566 |
| Tier 2 capital | 250 |
| Tier 3 capital | |
| Deductions: Illiquid assets | (1,358) |
| Total Capital Resources | 2,458 |
* No innovative tier one capital is held.
As at 31 December 2011, the firm’s Pillar 1 capital requirement was £1,053,000. This has been determined by reference to the firm’s Fixed Overheads Requirement (“FOR”) and calculated in accordance with the FSA’s General Prudential Sourcebook (“GENPRU”) at GENPRU 2.1.53. The requirement is based on the FOR since at all times this exceeds the total of the credit and market risk capital requirements it faces and also exceeded its base capital requirement of €50,000.
The FOR is based on annual expenses net of variable costs deducted, which include discretionary bonuses paid to staff and FX losses. The firm monitors its expenditure on a monthly basis and takes into account any material fluctuations in order to determine whether the FOR remains appropriate to the size and nature of the business or whether any adjustment needs to be made intra-year. This is monitored by the Chief Operating Officer and reported to senior management on a monthly basis.
Satisfaction of capital requirements
Since the firm’s ICAAP (Pillar 2) process has not identified capital to be held over and above the Pillar 1 requirement, the capital resources detailed above are considered adequate to continue to finance the firm over the next year. No additional capital injections are considered necessary and the firm expects to continue to be profitable.
Under Rule 2.2.3R of the FSA's Conduct of Business Sourcebook, Key Asset Management (UK) Limited (the "Firm") is required to include on this website a disclosure about the nature of its commitment to the UK Financial Reporting Council's Stewardship Code (the "Code") or, where it does not commit to the Code, its alternative investment strategy. The Code is a voluntary code and sets out a number of principles relating to engagement by investors with UK equity issuers.
The Firm manages and advises offshore and onshore funds and managed accounts (the “Key Funds”) that pursue a fund of hedge funds strategy that does not result in them investing directly in UK companies. The Key Funds primarily invest in open-ended funds incorporated outside the UK. Consequently, while the Firm supports the general objectives that underlie the Code, the provisions of the Code are not directly relevant to the type of investment currently undertaken by the Firm. Instead, the Firm actively engages with the underlying funds in which the Key Funds invest, and with the investment managers of those underlying funds, in order to monitor risk and performance. The Firm also participates in corporate actions affecting those underlying funds to the extent permitted by the voting rights held by Key Funds. If the investment strategy of the Key Funds changes in such a manner that the provisions of the Code become relevant, the Firm will amend this disclosure accordingly.