Pillar 3 Disclosure
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Engadine Partners LLP (the “Firm”) is authorised and regulated by the Financial Conduct Authority (“FCA”). The Firm is a discretionary investment manager to professional clients and unregulated collective investment schemes. The Firm is a full scope Alternative Investment Management Fund Manager (“AIFM”) and categorised as a collective portfolio management investment firm by the FCA for capital purposes. The Firm reports on a solo basis.
The FCA capital requirements for a BIPRU firm are set out in the General Prudential Sourcebook (“GENPRU”) and the Prudential Sourcebook for Banks, Building Societies and Investment Firms (“BIPRU”). The FCA framework consists of three ‘pillars’:
- Pillar 1 sets out the minimum capital amount that meets the Firm’s credit, market and operational risk;
- Pillar 2 requires the Firm to assess whether its Pillar 1 capital is adequate to meet its risks and is subject to annual review by the FCA; and
- Pillar 3 requires disclosure of specified information about the underlying risk management controls and capital position.
This disclosure fulfils the Firm’s Pillar 3 obligation to disclose to market participants key pieces of information on the Firm’s capital, risk exposure and risk assessment processes.
Risk Management Objectives and Policies
The Executive Committee of the Firm determines its business strategy and the risk appetite. The Executive Committee has designed and implemented a risk management framework that recognizes the risks that the business faces. The Executive Committee also determines how those risks may be mitigated and assesses on an ongoing basis the controls and procedures necessary to manage those risks. The Executive Committee on a regular basis discusses projections for profitability, liquidity, regulatory capital and considers business planning and risk management.
The Firm considers the following as key risks to its business:
- Business risk — This risk represents a fall in the Firm’s revenue which may hinder its ability to finance its operations and expenses. Business risks are assessed and mitigated as part of the Internal Capital Adequacy Assessment Process (“ICAAP”).
- Operational risk — This risk covers a range of operational risks ranging from the risk of trading errors to the risk of a breach of a Fund’s investment objectives. Legal and reputational risks are also included within the category of operational risk. Operational risks and mitigating factors are assessed as part of the ICAAP.
- Credit risk — This risk relates to the exposure to the Fund for non-payment of management and performance fees and counterparty exposure relating to the Firm’s bank balances and any other debtors. This is monitored by the Firm’s Chief Operating Officer and reported quarterly to the Executive Committee.
- Market risk — This risk is the exposure to foreign exchange fluctuations due to investment management and performance fees being denominated in currencies other than sterling.
The Firm is a limited liability partnership and capital arrangements are established in the Firm’s partnership deed. The Firm’s regulatory capital is the sum of Pillar 1 capital and Pillar 2 capital. Pillar 1 capital is the higher of:
- a base capital requirement of €50,000;
- the sum of market and credit risk requirements; and
- the Fixed Overhead Requirement (“FOR”).
In addition, the Firm, on account of its classification as a full-scope AIFM, is subject to a parallel ‘own funds’ requirement being the higher of:
- a funds under management requirement, subject to a minimum of €125,000; and
- ‘own funds’ based on the fixed overhead requirement; plus whichever is
- the professional negligence capital requirement; or
- the professional indemnity insurance requirement.
Although the foregoing ‘own funds’ requirement is not a component of the ‘Three Pillars’ regime, it is likely that the Firm’s ‘own funds’ requirement will exceed the Pillar 1 requirement.
Pillar 2 capital is calculated by the Firm as representing any additional capital to be maintained against any risks not adequately covered under the requirement in Pillar 1 as part of its ICAAP. When making this calculation, the Firm also takes into account the ‘own funds’ requirement detailed above, in particular where the own funds exceeds Pillar 1 capital (and the extent to which the Firm is able to use capital instruments to fulfil both requirements). It is the Firm’s expectation that the Pillar 1 capital requirement is normally represented by the Firm’s FOR. The Firm applies a standardised approach to credit risk, applying 8% to the Firm’s risk-weighted exposure amounts, consisting mainly of investment management and performance fees due but not received, and bank balances. Having performed the ICAAP, the Firm has concluded that no additional capital is required in excess of its Pillar 1 capital requirement and own funds.
As at 31 May 2017 the Firm’s regulatory capital position is:
- Tier 1 Capital: £568,750
- Total Capital Resources Requirement: £455,000
Management of the ICAAP
The approach of the Firm to assessing the adequacy of its internal capital to support current and future activities is contained in the ICAAP. This process includes an assessment of the specific risks to the Firm and the internal controls in place to mitigate those risks. Finally, an assessment is made of the probability of occurrence and the potential impact, in order to arrive at a level of required capital, as relevant. The Firm stress tests future impact by considering the Firm’s financial forecast for three years, its breakeven point, the estimated impact of the loss of a key client, and the costs to close.
The Firm’s ICAAP is formally reviewed by the Executive Committee at least annually and more frequently should there be any material changes to the Firm’s business or risk profile.
The Firm is required by FCA rules under BIPRU 11 to make certain disclosures in respect of remuneration. The remuneration structure at the Firm is designed to attract, motivate and retain the best people to ensure good performance for the underlying investors in funds, which in turn will achieve success for the Firm.
The Firm’s remuneration policy and practices seek to promote effective risk management and not encourage risk taking which is inconsistent with the risk profile of the funds managed by the Firm. Employees are remunerated at competitive market rates for the roles they perform, with any variable remuneration based on the performance of the individual and the performance of the Firm. Partners’ remuneration is based on a percentage of the Firm’s profits.
The Executive Committee maintains and implements the remuneration policy and practices that are consistent with and promote effective risk management and do not encourage risk taking. Its remit applies to partners in the Firm and employees of Engadine Partners Services (UK) Ltd.
The Firm considers partners of the Firm to be ‘Code Staff’ as defined by the FCA, being those who have a material impact on the risk profile of the Firm or funds managed by the Firm. This generally includes senior management, risk takers, those holding control functions and any employee whose total remuneration takes them into the same remuneration bracket as senior management.
The Firm is subject to the AIFMD Remuneration Code (the “Code”), has applied proportionality and, pursuant to this application and where relevant, has dis-applied various provisions of the Code. A key element of the remuneration policy is deferral of cash benefits from certain profit allocations through investment into the funds managed by the Firm which aligns the partners’ interests to the interests of the investors in the funds.
Remuneration in the aggregate will be disclosed following the elapsing of the Firm’s first full remuneration period.
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